Best Listener Questions of 2023, Ep #160

In this special episode of the Retirement Made Easy podcast, I revisit some of the most commonly asked—and popular—questions from 2023. We’ll tackle everything from capital gains tax to tax mapping for my clients. As tax filing season comes to an end, these are some important things to keep in mind. Give it a listen! 

You will want to hear this episode if you are interested in…

• [1:33] Question #1: How does a capital gains tax work? 
• [3:39] Question #2: Did contribution limits increase?
• [5:20] Question #3: How does the gift tax exclusion work?
• [8:09] Question #4: How do you convert a beneficiary IRA?
• [11:52] Question #5: How does tax mapping work for my clients?

Question #1: How does a capital gains tax work?

One of the advantages of owning a residential rental property is that you can depreciate your property over 27 ½ years. What does that mean? It reduces the amount of rental income that’s taxable. When you sell the rental property, there is depreciation recapture which will impact your taxes.

The couple I spoke with wanted to sell their rental properties. When you’ve lived in your home for two of the last five years, there is a capital gains exclusion of up to $500,000. If they live in their home for 10 years, bought the home at $200,000 and sold it for $700,000, that’s a $500,000 gain that they won’t have to pay taxes on. Anything above that amount will be subject to capital gains tax.

Question #2: Did contribution limits increase?

Tim is 63 years old and wants to max out his Roth IRA and 401k. Did the limits increase? Roth IRA limits increased to $7,500 for each spouse for someone over 50. 401k contributions increased $3,000. In 2023, if you’re over 50, you can contribute $30,000 annually. That’s a total of $37,500 you can save for retirement in 2023. 

Question #3: How does the gift tax exclusion work? 

The annual gift tax exclusion in 2023 is $17,000. You can gift any one person $17,000 per year and it doesn’t have to be reported on your taxes. They don’t have to report the $17,000 either. My wife could gift the same person $17,000. That’s $34,000 a couple could gift per person without it impacting your taxes. If you give more than $17,000 in a given year, it must be reported on your tax return. 

Question #4: How do you convert a beneficiary IRA to a Roth IRA?

The short answer is that you can’t convert a beneficiary IRA to a Roth IRA. I wish we’d be allowed to do this. In 2023, if you’re over 50, you can only contribute $7,500 to a Roth IRA per year. By removing the money from the IRA—taking a distribution—you’ll be taxed on it. However, you won’t be hit by the 10% penalty if you’re under 59 ½. 

If you’re over 50, and you’re trying to offset tax implications, and took a $7,500 distribution from the beneficiary IRA and put it in your own IRA, the taxes would be offset. It would be a wash.

And remember, you have 10 years to spend the money in the IRA, pay the taxes, and drain the account to zero. If you inherited it before 2020, you have to take required minimum distributions (a set amount every year). 

Question #5: How does tax mapping work for my clients?

We forecast someone’s tax implications in retirement. We’ll look at their sources of income (social security, pension, IRA withdrawals, etc.). We map this out year by year. Then we ask questions like, “Will most of your money be taxed at 12%? Will any be taxed at 22%? Can we avoid the higher tax bracket?”

We want to make sure we’re topping out the 12% bracket. We don’t want to pull money out of accounts without a tax plan. We’ll create a strategy to lower your tax burden in retirement. We don’t want you paying more taxes than you need to. 

Can you pinpoint anything that’s changed for 2024?

Resources & People Mentioned

• 3 Steps to Retirement Planning