By Sarah Brenner, JD
Director of Retirement Education
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IRAs are an important, but often overlooked, part of your overall tax planning. As the deadline for filing 2023 tax returns approaches, it is a good time to incorporate your IRA plan strategies with your overall tax plan. You are probably now busy gathering the necessary information to file your 2023 federal income tax returns. You will want to be sure that as you do so, you keep some important IRA rules and strategies in mind.

2023 IRA Distributions

If you received a distribution from an IRA in 2023, that distribution may affect your overall tax situation. Generally, distributions from retirement plans that include pre-tax dollars will be included in taxable income in the year taken. IRA distributions can increase ordinary income for the year of the distribution, which can potentially cause the loss of valuable exemptions, credits, tax deductions, and taxation of Social Security.

An early distribution may result in a 10% penalty on top of any income tax already owed for the distribution. Remember that rollovers should be reported on your tax return even though distributions taken in 2023 that are properly rolled over are not included in income for the year.

IRA Contribution Deadline for 2023

It is not too late for you to make a 2023 prior-year traditional or Roth IRA contribution. The deadline for IRA contributions is the tax-filing deadline — not including extensions. This year, for most taxpayers, that deadline is April 15, 2024. Having an extension to file your federal income tax return does not give you more time to make a 2023 IRA contribution.

SEP or SIMPLE IRA contributions work differently. These contributions may be made up to the business’ tax filing deadline — including extensions.

If you qualify, making a deductible traditional IRA contribution for 2023 is a valuable strategy to lower 2023 taxable income. Also, making your first Roth IRA contribution now as 2023 prior-year contribution will have the benefit of starting the five-year period for tax-free distributions of earnings as of January 1, 2023, even though the contribution is not actually made until 2024.  This strategy gives your client the potential to take qualified tax-free distributions of earnings from their Roth IRA in less than five years.

Unwanted or Excess 2023 IRA Contributions

Now is also the time to address unwanted or excess tax-year IRA contributions. You may have made a traditional IRA contribution believing you would be able to deduct it. Or, you made a Roth IRA contribution and discovered your income was too high. These contributions may be removed as an excess without penalty or recharacterized.

While the deadline for these corrective transactions is not until October 15, 2024, your 2023 federal income tax return may be affected. Therefore, doing these transactions now before filing can help avoid having to file an amended return later. Acting now also avoids the potential pitfalls of waiting until the last possible minute to meet this important deadline.

No Prior-Year Conversions

If you are looking at your 2023 tax situation and thinking that it would be beneficial to do a conversion, there is some bad news. There is no such thing as a prior-year conversion. It is too late. A 2023 conversion had to leave the traditional IRA in 2023 and be reported by the custodian on a 2023 Form 1099-R.

QCDs for 2023

It is also too late to do a 2023 qualified charitable distribution (QCD).  You cannot take a distribution in 2024 and have it count as a 2023 QCD.

If you did do a QCD in 2023, be aware that you will not be getting any specific reporting from the custodian showing this. You will only receive a 2023 Form 1099-R showing a distribution, but you will need to properly report the QCD on your 2023 tax return. Be sure that your tax preparer is aware that a QCD was done in 2023 so you can cash in on this valuable tax break.

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