Less Than Three Months Left in 2023 for TSP and IRA Planning

Some year-end tips for the thrift savings plan and individual retirement accounts.

As in most years, the year 2023 has flown by. We are in the last quarter of 2023 and the end of 2023 will soon be upon us. December 31 represents an important deadline for taking required minimum distributions (RMDs) and for several tax-savings opportunities both currently and in the future. This column discusses the importance of December 31, 2023 for Thrift Savings Plan (TSP) RMDs and traditional IRA RMDs, Qualified Charitable Distributions, and Roth IRA conversions.

TSP RMDs and Traditional IRA RMDs

SECURE Act 2.0 was passed into law on December 30, 2022 and became effective January 1, 2023. Among the provisions passed as part of SECURE Act 2.0 is the RMD age being raised from age 72 (applies to individuals born between July 1,1949 and December 31, 1950) to age 73 (applies to those individuals who were born between January 1, 1951 and December 31, 1959). As a result of this provision of SECURE Act 2.0, those retired federal employees born in 1951 do not have to take a 2023 TSP RMD. Any federal employee or retiree born in 1951 does not have to take a 2023 traditional IRA RMD if they own a traditional IRA – either a “contributory” traditional IRA or a “rollover” traditional IRA. Had this provision not been passed into law, these federal employees and retirees born in 1951 would have been required to take their first RMD during 2023.However, those federal employees or retirees who were born during 1950 (and became age 72 during 2022 and had to start taking their traditional IRA RMDs) must take their 2023 traditional IRA RMDs no later than December 31, 2023. Those federal employees or retirees born before July 1,1949 (and whose required beginning date is age 70.5) must also take their 2023 traditional IRA RMDs no later than December 31,2023.

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ROTH IRA owners never have to take RMDs. Those TSP participants aged 72 and older during 2022 do not have to take TSP RMDs during 2023 it they are still in federal service. But those TSP participants who are age 73 or older during 2023 and who have retired from federal service have to take a TSP RMD by December 31, 2023. The 2023 TSP RMD will also be the last year in which the TSP RMD will be determined based on the balances of the traditional TSP account (as of December 31,2022) AND the Roth TSP account (as of December 31,2022). Effective January 1, 2024, the Roth TSP will no longer be included in the calculations of the TSP RMD.

There is some confusion with respect to traditional IRA beneficiary RMDs. In IRS Notice 2023-54, the IRS waived 2023 RMDs for beneficiaries of inherited traditional IRAs subject to annual RMDs within the 10-year payment period. The latter requirement is a provision passed into law as part of SECURE Act 1.0 (passed into law in December 2019). During 2022, IRS Notice 2022-53 waived 2021 and 2022 RMDs for beneficiaries of inherited traditional IRAs. However, neither eligible designated beneficiaries (EDBs), nor traditional IRA beneficiaries who inherited traditional IRAs before January 1, 2020, are affected by either IRS Notice. Both EDBs and beneficiaries of traditional IRAs whose owners died before January 1, 2020 must take their 2023 RMD no later than December 31, 2023.

Qualified Charitable Distributions (QCDs)

QCDs have been and remain a great tax break for those individuals who are charitably inclined. With a QCD, traditional IRA owners or their beneficiaries can make a 2023 contribution to a qualified charity of up to $100,000 through a tax-free transfer directly from their traditional IRA.

Note that QCDs cannot be made from the traditional TSP. However, a traditional TSP participant aged 70.5 or older (whether still in federal service or retired from federal service) can request a direct rollover from the traditional TSP to a traditional IRA. Once the funds are in the traditional IRA, a QCD of up to $100,000 can be made. As a result of making a QCD, a traditional IRA owner cannot deduct the amount of the contribution as a charitable deduction on their federal income tax return. But if the traditional IRA owner has reached his or her required beginning date (age 70.5, age 72, age 73, or age 75 depending in which year the traditional owner was born) and therefore must take a traditional IRA RMD, a QCD equal in amount to the traditional IRA RMD will result in the traditional IRA RMD not being included in current year income.

Among the important benefits coming from a QCD are: (1) A QCD can allow a traditional IRA owner to mitigate “stealth” taxes based on adjusted gross income (AGI) such as the 3.8 percent surtax on net investment income and the “income related to monthly adjustment amount” (IRMAA) applied to Medicare Part B monthly premiums; and (2) QCDs can offset otherwise taxable traditional IRA RMDs. For retired federal employees who rollover portions of their traditional TSP to a traditional IRA for the purpose of doing a QCD, the amount rolled over will lessen the traditional TSP account balance in future years, thereby reducing future year TSP RMDs. Beginning in 2023, individuals can also make a one-time QCD to a split-interest entity such as a charitable gift annuity.

Since there is no such thing as a “prior-year” QCD, those individuals aged 70.5 and older who are eligible to perform a QCD (and to therefore take advantage of the tax breaks associated with a QCD for 2023) need to perform the QCD before December 31, 2023. When performing a QCD, it is important for an individual to leave a sufficient amount of time to ensure that the charity has received the traditional IRA funds and the QCD has been handled properly.

Roth IRA Conversions

As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), individual federal income tax rates remain historically low and will remain this low until January 1, 2026. The TCJA is due to expire on December 31, 2025, unless Congress renews the TCJA. This means that because of the current low individual tax rate environment, converting traditional IRAs to Roth IRAs is a wise financial move for many individuals between now and January 1, 2026.

However, to qualify as a 2023 Roth conversion, the converted traditional funds must leave the traditional IRA no later than December 31, 2023. There is no such thing as a ‘prior-year” Roth IRA conversion. Roth IRA conversions are taxable in the year of conversion and cannot be reversed. This means that individuals must make sure that they have a sufficient amount of liquid assets, passbook savings or money market funds in order to pay the federal and (and in most states) state income tax due on conversion before they decide to convert the traditional IRA to a Roth IRA. It is likely that estimated federal and state income tax payments will have to be paid on Roth IRA conversions performed during the last quarter of 2023. Traditional IRA owners performing these conversions should be sure to check with their tax advisors about making these estimated tax payments. Estimated tax payments for the quarter of 2023 are due to be paid no later than January 16, 2024.

It is also a good idea to wait until early December 2023 before performing a Roth IRA conversion in order to get a better picture of one’s 2023 federal and state income tax liability situation. But an individual should not wait too long into December to perform the Roth IRA conversion. This is because some IRA custodians will not process Roth IRA conversions requests for 2023 after a specific date.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.