Changes in the law that could affect your estate and financial plans in 2023

By Bill Root

Estate and Gift Tax Exclusions

The gift tax exclusion for 2023 is $17,000 (it was $16,000 in 2022). As a result, you can give up to $17,000 to as many people you want in 2023 without having to worry about paying the federal gift tax. And, if you're married, your spouse can also give $17,000 to the same people. This means that you and your spouse can give $34,000/year per recipient beginning this year.

As an example, if you and your spouse have three children and five grandchildren, you may transfer $272,000 in 2023 to them without touching your combined $25.84 million gift tax exemption, thus allowing you to transfer further substantial assets gift-tax-free. Not only are the assets removed from your taxable estates, the assets’ future appreciation also avoids gift and estate taxes.

If you gift an amount that is above the annual gift tax exclusion (in excess of $17,000 per recipient), you will use a portion of your lifetime gift tax exemption ($12.92 million in 2023). The gift and estate tax exemption are linked, meaning that the use of your gift tax exemption will reduce the amount you may leave at death estate-tax-free. If you make gifts in excess of the annual gift tax exclusion, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.

Please be aware that the lifetime estate and gift tax exemption of $12.92 million in effect this year will be cut in half at the start of 2026 under current law. There has been no legislation passed to make the gift and estate tax increases passed by Congress in 2017 permanent.

Retirement Accounts and IRA’s

The amount you can contribute to your 401(k) plans in 2023 will increase to $22,500 – up from $20,500 for 2022. The income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver's Credit will also all increase for 2023.

For people who have a retirement account outside of their employer, annual contribution limits have increased for both traditional IRAs and Roth IRAs. In 2023, eligible individuals can contribute up to $6,500, up from $6,000, to their IRAs.

Roth IRAs have income limits, so individuals making above a certain income threshold are eligible for reduced contributions. Individuals who make above the upper range of that threshold are not eligible at all.

In 2023, the income phase-out range for single filers is $138,000 to $153,000. For married couples filing jointly, it’s $218,000 and $228,000.

The 2023 federal budget legislation signed into law in December 2022 includes major changes to the rules for retirement accounts like 401(k) plans, IRAs and Roth IRAs. These new changes to retirement regulations follow in line with the amendments of the Secure Act of 2019 ("Secure" being short for "Setting Every Community Up for Retirement Enhancement") and are collectively called the Secure 2.0 Act of 2022.

The biggest changes for most of us with retirement accounts are the extension of the age for required minimum distributions and increased "catch-up" limits for people over 60. But there are more than 90 different retirement changes overall in the legislation.

Here are just a few:

Required minimum distributions, or RMDs, in 2023

Currently, you must start receiving required minimum distributions from your 401(k) and IRA accounts starting at age 72 (or 70 and a half if you turned that age before Jan. 1, 2020). The Secure 2.0 Act of 2022 raises the age for RMDs to 73, starting on Jan. 1, 2023, and then further to 75, starting on Jan. 1, 2033. (Roth IRAs are not subject to RMDs.)

The new rules also reduce the penalty for failing to take RMDs. The previously steep 50% excise penalty will be reduced to 25%, and lowered further to 10% if the error is corrected "in a timely manner." The penalty reductions take effect immediately, now that Biden has signed the law.

New contribution limits for 401(k) plans and IRAs

While the standard limits for contributions to 401(k) plans and IRAs won't change, the law will boost the "catch-up" limit for persons over 50 and introduce additional potential "catch-up" contributions for those older than 60.

People age 50 and up can contribute an additional $1,000 to their retirement accounts each year over the standard limit. Starting in 2024, instead of a flat $1,000 more, people aged 60-63 will soon be able to contribute even more catch-up money. In 2025, those seniors will be allowed to contribute up to $10,000 per year or 50% more (whichever is greater) than the standard catch-up contribution for those 50 and up. Those increased contribution limits will also be indexed with inflation starting in 2025.