2023 Year-end Update

As much as many people do not want to think about taxes at the end of the year, it is important to take some time now and review your finances and your taxes. This is especially true if you have investment or brokerage accounts and other assets or if you have a small business. In this note, I will write about:

• Mutual funds, dividends, and capital gains,
• IRA Contributions,
• IRA Required Minimum Distributions (RMD), and
• Charitable contributions using Qualified Charitable Distributions (QCD) or appreciated assets.

Please keep in mind that without knowing your specific details, I cannot provide professional advice about your situation. It is up to you to use this information and follow up with your advisors. You should be having conversations about these topics with your financial advisor.

Mutual funds, dividends, and capital gains

I recently had a conversation with a financial advisor who asked about whether my clients understood the taxes they pay on reinvested dividends and capital gains in their mutual funds or managed accounts. Unfortunately, most people do not understand that they pay taxes on distributed dividends and capital gains, even though they may not receive a check for the funds. Each year, I explain to clients that even though they did not receive a check from Fidelity or Schwab or Vanguard or Ameriprise or T. Rowe Price or Edward Jones or something similar, they still had dividend and capital gain distributions, and they are reported on a Form 1099. This is important for two reasons. First, that the reinvested income is taxable. Second, the reinvested income reduces your basis in the investment. This is a conversation for another note.

You can contact your investment advisor for information about your dividend and capital gain distributions. If you do not have an investment advisor, you can contact whichever investment company has your mutual fund accounts.

Reinvested mutual fund and capital gain distributions in retirement accounts are not taxable. They will be taxed at distribution.

IRA Contributions

The amount that you can contribute to a Traditional IRA and a Roth IRA changes each year as the IRS adjusts the limits for inflation.

For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than:

• $6,500 ($7,500 if you’re age 50 or older), or
• If less, your taxable compensation for the year

IRA Required Minimum Distributions (RMD)

According to the IRS, you must begin withdrawing from your IRAs and Roth IRAs at some point.

You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

Roth IRAs do not require withdrawals until after the death of the owner; however, beneficiaries of a Roth IRA are subject to the RMD rules. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. 2023 RMDs due by April 1, 2024, are still required. 

Your required minimum distribution is the minimum amount you must withdraw from your account each year.

• You can withdraw more than the minimum required amount.
• Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

For detailed information see: Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service (irs.gov)

Charitable contributions using Qualified Charitable Distributions (QCD) or appreciated assets.

With the increases in the standard deduction, many people are looking for tax advantaged ways to make charitable contributions. The two most common are using Qualified Charitable Contributions or making donations of appreciated assets. The concepts are simple, but as with many things, the details are not. Be sure to talk to your advisor.

A QCD is a type of retirement plan distribution in which the funds are sent directly to a charitable organization by the plan administrator. The account holder does not receive the proceeds from the distribution. Neither the distribution, nor the contribution is reported on the tax return. You can find details in the notice from the IRS. Reminder to IRA owners age 70½ or over: Qualified charitable distributions are great options for making tax-free gifts to charity | Internal Revenue Service (irs.gov) The notice is for 2022, however, the concept remains the same.

Another tax saving approach to charitable contributions is to donate appreciated assets like stocks or real estate. Generally, you can avoid paying tax on capital gains. However, you can deduct the full fair-market value of the contribution. If you use this approach, be sure to talk to your advisors first.