Whether you are finalizing the details of your 2022 tax returns or thinking ahead to next year’s tax season, it is a given that we all want to owe less. With that in mind, what are some excellent ways to “optimize” your tax status, as financial planners and tax accountants sometimes refer to the process of reducing a tax bill?

As a senior financial planner at Altfest Personal Wealth Management, I specialize in helping clients think about tax optimization. I’m a certified public accountant (CPA) and a certified financial planner (CFP®) who started my career in public accounting before serving as the finance director for trading desks at several international investment banks.

With tax season on everyone’s mind in April, I’d like to share a few tax-advantaged moves you can make that may lower what you owe in state and federal taxes. As a reminder, Altfest does not provide tax advice, and you should consult with your tax advisor about your specific circumstances.

 

What the SECURE Act 2.0 Can Do for You

Several new tax savings opportunities emerged at the end of 2022 when the “SECURE 2.0” Act, part of a larger package of federal government spending, was enacted. It builds upon and expands many favorable retirements account provisions added by the SECURE Act of 2019.

Among the many benefits, SECURE 2.0 offers for older taxpayers is the opportunity to delay required minimum distributions (RMDs) a while longer.

Effective this year, you can delay RMDs to the year you turn 73 (up from age 72 previously). This requirement will be pushed back to age 75, beginning in 2033. As before, you must take an RMD for the year you turn 73, but you can delay your first RMD until April 1 of the following year. If you defer, you must take two RMDs that year (one for the calendar year you turned 73 and the regular one for the calendar year you’re turning 74).

This pushback for RMDs is likely to add time for people in their 60s and early 70s to make Roth conversions, which are taxed at that time, not upon withdrawal. Doing so can be positive for your future tax bills and for heirs, who can inherit the Roth IRA and, in most cases, take tax-free withdrawals from it over a 10 year period after the original holder’s death.

Another plus from SECURE 2.0 is the immediate reduction of penalties for missing RMDs. They are now usually assessed at 25% of the amount owed in distributions, dropping from a prior hefty 50% penalty, with a potential further reduction to 10% under certain circumstances.

The Act does not offer a retroactive pause for RMDs, however. If you were required to start them in 2022 because you turned 72, you still must take your 2023 RMD this year. Also, remember that if you are a greater than 5% owner in your own business, even if you are still working, you need to take RMDs from retirement plans at 73.

Conversely, if you have had a Roth account within an employer plan, known as a Roth 401(k), the mandated RMDs (albeit tax-free) will be eliminated in 2024 under this new law. This change will avoid having to transfer assets from an employer’s Roth account to a Roth IRA to avoid forced distributions.

Another bonus from the SECURE 2.0 legislation arises from more generous “catch-up” contributions for older workers. Starting January 1, 2025, employed people aged 60 to 63 can contribute more than $10,000 or 150% of the “standard” pretax catch-up (set at $7,500 for 2023 for those 50 and older) to their employer plans above the typical annual contribution limit. This “Super Catch-Up” provision applies to 401(k), 403(b), and most governmental 457 plans. This should let workers aged 60 to 63 put in an additional 50% above the standard catch-up amount. Be aware that the $10,000 Super Catch-Up baseline will receive a federally determined cost-of-living adjustment (COLA) for inflation starting in 2026, so in some years, the Super Catch-Up limit may even exceed 150%.

Another note: In 2024, the standard catch-up and Super Catch-Up monies must go into Roth accounts if a worker had wages greater than $145,000 from that employer in the prior year. That annual salary benchmark also will get a COLA increase annually starting in 2025, in multiples of $5,000.

IRAs currently have a $1,000 catch-up contribution limit for people aged 50 and over. But under the new law, in 2024, that limit will also be indexed to inflation, rising in $100 increments over time.

One last plus from the SECURE 2.0 Act is student loan payment matching. Next year, employers will be permitted to match student loan payments that an employee makes with contributions to the employee’s workplace retirement account to ensure that younger workers with these loan payments do not short themselves in retirement savings.

Also, in 2024, more situations when withdrawals can be made without the 10% penalty before someone turns 59.5 will be allowed. These expanded allowances primarily cover minor, emergency withdrawals.

 

Tax-Loss Harvesting Possibilities

Another idea I would like to share is “tax-loss harvesting” – or offsetting capital gains with capital losses – and I will give an example of a tax-efficient way of doing it.

Your investment statements usually show a stock ownership position, showing an overall gain or loss for the holding. What you need to look for or create in tax-loss harvesting are temporary losses in specific stock-lot sales to garner a benefit at tax time.

For example, a client I worked with had a significant holding of Boeing stock. He was reluctant to sell any of it, but to achieve tax-loss harvesting benefits, I suggested he sell a small portion of his stake, then repurchase it after 31 days (about 1 month). He did and recorded a significant loss on many shares sold. Say he sold 200 shares, realizing a total loss of $29,000 from their original price. That amount of capital loss would provide a tax saving of approximately 25% on long-term capital gains, at least for New York City and state taxation combined. In other words, a 25% savings of about $6,000 to $7,000 would result from that trade.

However, to avoid a “wash sale,” you could not repurchase the same stock for at least 30 days after recognizing the loss. In that waiting period, you could buy the same amount of similar stock, say, Airbus, in this Boeing shareholder’s case, or you can hold off the original position for one month before repurchasing it.

 

Find out more

We are always eager to help you find the best ways to lower your tax bill. We realize that each client or potential client’s situation is unique, so we encourage you to contact our firm with any financial planning questions. Altfest advisors are ready to evaluate your circumstances to suggest tax optimization strategies.

If you’re not yet an Altfest client, please book some time for a Complimentary Consultation.

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.