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Year End Tasks: RMDs and Gift Tax Exclusions

Year End Tasks: RMDs and Gift Tax Exclusions

| November 13, 2023

Drawing down your retirement savings is necessary to avoid tax penalties.  Here are two things to watch for, especially here at year's end.  

Required Minimum Distributions (RMDs)

Tax deferral doesn’t last forever. At some point, the IRS wants its money. In the case of IRAs and qualified retirement plans, federal tax law requires participants to take out a minimum amount annually, usually beginning in the year they turn 73.

What It's About

Participants in qualified retirement plans and IRAs must begin taking annual distributions equal to or greater than a required minimum amount in the year they turn 73. A penalty applies if the account owner fails to take a withdrawal, or withdraws less than the required amount.

How It Works

The RMD rules apply to all employer sponsored qualified retirement plans, traditional IRAs and IRA-based plans (but not Roth IRAs). The first RMD is not due until April 1 of the year after an individual turns 73, but many take it in the year they turn 73 to avoid taking two distributions in one year. When an account owner dies, beneficiaries must continue to take RMDs to avoid penalties. RMD distributions are taxed as ordinary income.

How It Works

Taking RMDs as required avoids substantial penalties. Plan owners who do not need the money customarily withdraw the minimum amount so the remaining balance can continue to enjoy tax deferral and potential compound earnings

Annual Gift Tax Exclusion

Every year, individuals can give gifts equal to the exclusion amount ($17,000 in 2023) to as many people as they choose without paying gift tax. A yearly gifting program can provide a systematic and progressive transfer of wealth.

What It's About

The annual gift tax exclusion shields gifts, up to the exclusion amount, from the federal gift tax. These gifts reduce the size of the donor’s estate without incurring transfer taxes.

How It Works

The gift must be complete, voluntary, and of a present interest (not a future interest or conditional gift). A married couple can double their exclusion amount by each making a gift up to the annual limit to the same donee or by “splitting” a gift. Gift splitting occurs when only one spouse owns the gifted property and the other spouse agrees in writing to use their own exclusion amount for half the gift.

Why Is It Useful?

Lifetime giving reduces the taxable estate by transferring wealth tax free. It also provides donors with the opportunity to enjoy helping family members by paying off an adult child’s loan, contributing to a down payment on a house, purchasing a car for a relative, and so forth.

How To Proceed

Our team of Financial Consultants are available to help you through your options.  Contact us for a consultation today! 

This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This material was prepared by PGI Resources, Inc. on behalf of LPL Financial, LLC.  Copyright 2023.