Author: John

The amount you pay for Medicare is based on your income from 2 years ago (for example, your 2024 Medicare premiums are based on your 2022 tax return).  The more income you made in 2022, the more you pay in 2024 as Medicare premiums.  If you find that your income has gone down since filing the 2022 return AND you had a life-changing event (the most common life-changing event is retirement), then you can ask Social Security (who administers the Medicare surcharges) to base your 2024 premiums off of your lower expected current income.  Other common life-changing events are the marriage, divorce, or death of a spouse, a work reduction or stoppage, the loss of pension income, or the non-voluntary loss of an income-producing property.  So, for example, if you sold your business in 2022, which caused you to have large income in 2022, then retire and get a letter from Social Security telling you that you are going to pay more Medicare premiums in 2024, then tell Social Security that you retired and your income will be less in 2024 than it was in 2022 and they will base your 2024 premiums off of your expected 2024 income.

If you filed your tax-return late or owed tax to the IRS past the 4/15 payment deadline, you will be assessed a “Failure to File Penalty” or a “Failure to Pay Penalty”.  These penalties can be up to 25% of your unpaid tax.  The IRS has a first-time abatement program whereby if you have not had a similar penalty in the previous 3 years, they will automatically waive these penalties if you call and ask them.  In order to take advantage of this, prepare the tax return without the penalty, don’t pay the penalty, and wait for the notice from the IRS assessing the penalty and asking you to pay it.  Then call the IRS and see if the penalty can be waived.

The IRS generally wants you to pay your tax liability to them throughout the year and charges you 8% interest if you don’t. If you didn’t pay enough throughout the year and find yourself still owing money to the IRS at the end of the year, consider taking an IRA withdrawal by year-end and withholding all of it. You then can take money from your checking account and contribute that money back to your IRA as a rollover (if done so within 60 days of the withdrawal). Your cash flow will be the same as if you gave the money directly from your checking account to the IRS but by using this two-step process, you will avoid paying 8% interest to the IRS since the IRA withholding is deemed to have been paid equally throughout the year even though it was actually paid at year-end.

An early IRA withdrawal, typically before age 59 & 1/2, is subject to a 10% penalty tax on the taxable portion. There are several exceptions to this penalty. Reach out to your tax advisor with questions.

1. Medical expenses: medical expenses exceeding 7.5% of AGI are exempt
2. Higher Ed expenses: qualified educational expenses can be considered penalty-free withdrawals
3. First-time home purchase: withdrawals up to a $10K lifetime limit are available for home acquisition costs.
4. Substantially equal periodic payments: penalty-free withdrawals require adhering to specific conditions.
5. Disability: withdrawals due to disability are penalty-free under specific conditions
6. Long-term care: beginning in 2025, withdrawals for qualified long-term care are exempt
7. Birth or adoption: withdrawals are possibly penalty-free up to $5K for birth or adoption expenses
8. Emergency expenses: a new provision permits up to $1K annually for emergency expenses
9. Disaster recovery: withdrawals are exempt up to $22K for qualified disaster recovery
10. Military: active-duty reservists can withdraw penalty-free
11. Terminal illness: withdrawals are penalty-free for the terminally ill
12. After-death withdrawals: withdrawals are penalty-free after the death of the account owner
13. Health insurance premiums during unemployment: withdrawals can be penalty-free for health insurance payments made during unemployment.
14. IRS levies: if a withdrawal is to pay an IRS levy against the IRA account, it is exempt from penalties
15. Victim of domestic abuse: withdrawals up to $10K are penalty-free for domestic abuse victims

Indiana offers a credit of 20% of your contributions to a 529 account with a maximum credit of $1,500. If you have a child in college or private K-12, then contribute $7.5K to their Indiana College Choice 529 account, and then turn around and put that money back into your personal checking account. You don’t need to leave the 529 funds in the 529 to get the $1.5K Indiana tax
credit (i.e., save $1.5K of Indiana tax each year you do this). Contributions are now based on
an April 15^th deadline. Meaning you can contribute towards the prior year up until April 15^th of the following year as long as you apply the contribution to the prior year. To ensure you get the credit, you must have an Indiana 529 account. Indiana does cross reference the account contributions with your return and will deny the credit if the account isn’t an Indiana account.

Inherited IRAs are subject to Required Minimum Distributions (RMDs) according to the SECURE Act. Per the SECURE Act, RMDs would be required for each of the first nine years following the decedent’s death with the remaining balance to be withdrawn in the tenth year. However, the IRS will not begin penalizing missed RMDs until 2025 at the earliest. The IRS announced that penalties will not be imposed on taxpayers who fail to take the RMDs on IRAs and Roth IRAs inherited from decedents who passed away after 2019 through year end 2024. While RMDs may not be required for 2024, we recommend that you strategize with your CPA on the best way to distribute funds from these accounts before the end of the tenth year so you don’t end up with a large tax impact in year ten.

Remember these withdrawals would still be subject to ordinary income tax – we are solely avoiding the 10% penalty on early withdrawals (before 59 ½) with these exceptions.  Beginning in 2023, individuals with a terminal illness will be able to withdraw funds from their retirement plans or IRAs without penalty and there is no limit to this exception.  In 2024, victims of domestic abuse would be able to withdraw up to $10,000 from their retirement plan or IRAs penalty free.  Starting in 2026, individuals subject to long term care would be able to withdraw up to $2,500 penalty free from their retirement plan but not IRAs. 

Beginning in 2024, unused 529 accounts can be rolled over to a ROTH IRA in the beneficiary’s name.  The account must be open for at least 15 years and have no new contributions in the last five years.  These rollovers will be limited to the annual ROTH IRA contribution limits, currently $6,500.  There is also a lifetime limit of $35,000.  These rollovers will be tax and penalty free.

If you inherited an IRA from someone who passed after 12/31/2020, there has been a lot of confusion on how to officially handle these accounts.  All agree that the account must be completely emptied by the end of the 10^th year following the year of the original account owner’s death.  However, are you supposed to be taking RMDs from this inherited IRA?  Initially, the answer was no.  Then, the IRS said yes but they would not require them before 2023.  Now, we are still waiting on final regulations from the IRS but the IRS has delayed RMDs to 2024 at the earliest.  What does this mean?  If you have an inherited IRA from someone who passed after 12/31/2020, you are not required to take a RMD until 2024 at the earliest.  You can take distributions but you are not required to do so. 

Do you have student loan debt that is keeping you from contributing to your employer’s retirement plan? Beginning in 2024, employers may match contributions when employee’s make student loan payments. If the employer has a student loan matching plan, the employer can make the company match contribution to the employee’s plan. You as the employee can then continue paying down your debt and have your employer fund your retirement plan. Further clarification on this matter is expected to be released before this goes into effect in 2024. 

Roth IRAs do not have RMDs because taxes are paid when you make your contribution. However, a Roth 401(k) does have RMD requirements. To avoid the RMD, you roll your Roth 401(k) into your Roth IRA. You only need to do this if you reach(ed) RMD starting age in 2023 or earlier. In 2024, Roth 401(k)s will no longer be subject to RMDs.

Beginning in 2024, beneficiaries of 529 education-savings accounts may transfer funds into their Roth IRA without taxes or penalties. In order to be eligible, the 529 must have been open for a minimum of 15 years and the owner of the Roth IRA must be the beneficiary of the 529 plan. The rollover limit is $35,000 lifetime and limited to the annual Roth contribution limits which are currently $6,500 or $7,500 per year. If you have a large balance, this will take a few years to execute.

Are you over 70.5 and make charitable donations each year?  You may be able to use a qualified charitable distribution (QCD) which allows you to donate up to $100,000 per year directly from your IRA. The amount donated will count against your required minimum distribution requirements and reduces your taxable income on IRA distributions. If you typically take the Standard Deduction, the QCD allows you to get a deduction for your donations. Starting in 2024, qualified charitable distributions limit will be adjusted for inflation.

SECURE 2.0 Act of 2022 increased the minimum age for individuals to begin taking their Required Minimum Distributions (RMD) from their qualified pre-tax accounts (401(k)s, IRAs, 403(b)s, 457(b)s) from 72 to 73.  For an individual who turns 72 after December 31, 2022 and 73 before January 1, 2033, their first RMD must be taken by April 1 of the calendar year following the year they turn 73.  This means for individuals born in 1951, the first RMD does not need to be taken until April 1, 2025.  If you were born in 1951 and mistakenly took an RMD in 2023 already (not required to), you have until September 30, 2023 to “rollover” the distribution amount back into the account and avoid any tax liability.  A typical rollover is required to be completed within 60 days but the IRS has given relief for those who mistakenly took an RMD in 2023 until September 30, 2023 regardless of when the RMD was taken.

If you withdraw money from a retirement account before age 59.5, you will likely be subject to an additional 10% penalty on total withdrawals. There are many exceptions to this penalty and Secure 2.0 Act adds a few more to the list.  In 2023, new exceptions include terminal illness, income attributable to excess contributions or a qualified disaster. Beginning in 2024, new exceptions will include expenses from financial emergency and victims of domestic abuse.