Draining The Lifeblood Of The Economy

In the final days of 2022, Congress passed a new set of retirement rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

The law is called SECURE 2.0, and it’s a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019.

The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, I broke the major provisions of the new law into four sections.

New Distribution Rules

RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). And starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.¹

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.²

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.³

New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.⁴

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.⁵

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.⁶

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, employers can roll a 529 education savings plan into a Roth IRA. So if your child gets a scholarship, goes to a less expensive school, or doesn’t go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.⁷

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.⁸

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.⁹

More Highlights

Support for Small Businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.¹⁰

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.¹¹

Remember that just because retirement rules have changed does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It’s not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

A Checklist for When a Spouse or Parent Passes

When you lose a spouse, partner, or parent, the grief can be overwhelming. In the midst of that grief, life goes on. There are arrangements to be made, things to be taken care of – and in recognition of this reality, here is a checklist that you may find useful at such a time.

First, gather documents. Ask for help from other family members if you need it. Start by gathering the following.

• A will, a trust, or other estate documents. If none of these exist, you could face a longer legal process when settling the person’s estate.
• A Social Security card/number. Generally, the person’s Social Security number will be retired shortly following the death. If you are uncertain, consider checking with the Social Security office.

Then, gather these additional highly important items.

• Any account statements
• Deeds/titles to real estate
• Car titles or lease agreements
• Storage space keys/account records
• Any bills due or records of credit card statements
• Any social media platform information, if applicable

Last, but not least, look for a computer file or printout with digital account passwords. Prior to their loved one’s passing, some family members may try to centralize all this information or state where it can be found.

In addition, see if the person left a letter of instructions. A letter of instructions is not a legal document; it’s a letter that provides additional and more-personal information regarding an estate. It can be addressed to whomever you choose, but typically, letters of instructions are directed to the executor, family members, or beneficiaries.

Next, take care of some immediate needs. One, contact a funeral home to arrange a viewing, cremation, or burial, in accordance with the wishes of the deceased.

Two, call or email the county clerk or recorder to request 10 to 12 death certificates; a funeral home director can often help you with this matter. (Counties usually charge a small fee for each copy issued.) Ten to 12 copies may seem excessive, but you may need that many while working with insurance companies and various financial institutions.

Three, if the person was still working, contact the human resources officer at your loved one’s workplace to inform them what has happened. The HR officer might need you to fill out some paperwork pertaining to retirement plans, health benefits, and compensation for unused vacation time.

Four, consider speaking with an attorney – this can be the lawyer who helped your loved one create a will or estate plan. Should your loved one die without a will, you may want to contact a lawyer for an overview of how the probate process will work and see to what degree you might become liable if your loved one had any outstanding debt obligations.

Five, resolve to keep track of any recurring debts that your loved one had set to autopay. Consider placing the monthly bills for these debts in your name (or another family member or the executor).

Notify creditors and credit card companies that were part of your loved one’s credit history. Creditors may want to know when existing debts will be paid, either by you or your loved one’s estate. You can also notify the “big three” credit bureaus – Experian, Equifax, and TransUnion – of their passing, which can usually be done online, over the phone, or by letter.

Following these steps, address financial, insurance, and credit matters. Investment and retirement plan accounts and insurance policies should have beneficiaries, so reach out to the financial and insurance professionals who helped your loved one as well as the person overseeing their workplace retirement plan. Talk with these professionals to learn about the possible tax implications from inheriting these assets.

State and federal taxes for your loved one will also need to be paid, and possibly, other taxes for the year of their death.

Remember, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your any tax or estate strategy.

If your loved one owned a small business or professional practice, a discussion with business partners (and clients) may be necessary as well as a consultation with the attorney who advised that business.

Look after your future. Working through several of these issues may help bring closure to your loved one’s estate.

Starting a Roth IRA for a Teen

Want to give your child or grandchild a financial head start? A Roth IRA might be a choice to consider. Read on to learn more about how doing this may benefit both of you.

Rules for setting up a Roth IRA. If your teen has an earned income, you may be able to set up a Roth IRA for them. For example, if your 15-year-old has earned $6,000 at a summer job, you can set up an account for them up to $6,000 (the maximum annual Roth IRA contribution). The amount cannot exceed the teen’s income. Keep in mind that money that you contribute to the Roth IRA can count as a gift within your $15,000 yearly gift tax exclusion ($30,000 for a married couple).¹

Looking ahead to the future. If money is withdrawn from a Roth IRA before age 59½, a tax 10% federal tax penalty may apply. There is, however, a notable exception. Up to $10,000 of investment earnings can be taken out of a Roth IRA at any time if the money is used to buy a first home. In this instance, the IRS may waive the early withdrawal penalty. Should your teenager become a parent someday, a portion of those Roth IRA assets might also be utilized to pay college tuition costs for themself or their child.^2,3

This article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax professional before modifying any Roth IRA strategy. Tax-free and penalty-free withdrawal also can be taken under circumstances other than first-home purchases, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. To qualify for the tax-free and penalty-free withdrawal of earnings, the teenager must meet a five-year holding requirement and occur after age 59½.

Greater earning potential, thanks to the magic of compound interest. Setting up a Roth IRA for a teenager is a great way to introduce them to basic financial concepts, such as compound interest. Giving your teen a hands-on learning experience may help them understand the value of saving for the future. You may also be facilitating the development of your children’s or grandchildren’s financial habits.

There are a few things to consider when setting up a custodial Roth IRA. Setting up a Roth IRA for a minor is often referred to as a custodial IRA. Until the child is able to take it over, you act as the custodian of the account. Individual state laws determine when the minor child is able to take over management of the Roth IRA for themselves.

A tax professional can provide guidance that may help ensure that you and your minor child are following all federal and state regulations.

SECURE Act 2.0 Passed in Final Days of 2022

Congress spent the final days of 2022 on new reforms designed to help Americans save more for retirement.

You may hear the changes called SECURE Act 2.0, which is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted into law in late 2019.¹

SECURE 2.0 contains dozens of provisions, but one key change is critical to understand. Starting January 1, 2023, the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs) increases to 73 years of age. And starting in 2033, RMDs may begin at age 75.²

If you have already turned 72, you must continue taking distributions. But if you are turning 73 this year, we may want to revisit your approach.

SECURE 2.0 was tucked in the $1.7 trillion federal spending bill, so as more people become familiar with the legislation, expect more details to emerge. In the meantime, if you have any questions, don’t hesitate to call.²

Happy New Year.

Budget Check Up: Tax Time Is the Right Time

Every year, about 150 million households file their federal tax returns. For many, the process involves digging through shoe boxes or manila folders full of receipts; gathering mortgage, retirement, and investment account statements; and relying on computer software to take advantage of every tax break the code permits.¹

It seems a shame not to make the most of all that effort.

Tax preparation may be the only time of year many households gather all their financial information in one place. That makes it a perfect time to take a critical look at how much money is coming in and where it’s all going. In other words, this is a great time to give the household budget a checkup.

Six-Step Process

A thorough budget checkup involves six steps.

1. Creating Some Categories. Start by dividing expenses into useful categories. Some possibilities: home, auto, food, household, debt, clothes, pets, entertainment, and charity. Don’t forget savings and investments. It may also be helpful to create subcategories. Housing, for example, can be divided into mortgage, taxes, insurance, utilities, and maintenance.
2. Following the Money. Go through all the receipts and statements gathered to prepare taxes and get a better understanding of where the money went last year. Track everything. Be as specific as possible, and don’t forget to account for the cost of a latte on the way to the office each day.
3. Projecting Expenses Forward. Knowing how much was spent per budget category can provide a useful template for projecting future expenses. Go through each category. Are expenses likely to rise in the coming year? If so, by how much? The results of this projection will form the basis of a budget for the coming year.
4. Determining Expected Income. Add together all sources of income. Make sure to use net income.
5. Doing the Math. It’s time for the moment of truth. Subtract projected expenses from expected income. If expenses exceed income, it may be necessary to consider changes. Prioritize categories and look to reduce those with the lowest importance until the budget is balanced.
6. Sticking to It. If it’s not in the budget, don’t spend it. If it’s an emergency, make adjustments elsewhere.

Tax time can provide an excellent opportunity. You have a chance to give your household budget a thorough checkup. In taking control of your money, you may find you are able to devote more of it to the pursuit of your financial goals.

IRA Withdrawals that Escape the 10% Tax Penalty

The reason withdrawals from a Traditional Individual Retirement Account (IRA) prior to age 59½ are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement.¹

Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from a Traditional IRA without incurring a 10% early withdrawal penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½ without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

1. Death — If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception.^2,3
   
   
2. Disability — Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.⁴
   
   
3. Substantially Equal Periodic Payments — You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.⁴
   
   
4. Home Purchase — You may take up to $10,000 toward the purchase of your first home. (According to the Internal Revenue Service, you also qualify if you have not owned a home in the last two years). This is a lifetime limit.
   
   
5. Unreimbursed Medical Expenses — This exception covers medical expenses in excess of 7.5% of your adjusted gross income.
   
   
6. Medical Insurance — This permits the unemployed to pay for medical insurance if they meet specific criteria.
   
   
7. Higher Education Expenses — Funds may be used to cover higher education expenses for you, your spouse, children, or grandchildren. Only certain institutions and associated expenses are permitted.
   
   
8. IRS Levy — Funds may be used to pay an IRS levy.
   
   
9. Active Duty Call-Up — Funds may be used by reservists called up after 9/11/01, and whose withdrawals meet the definition of qualified reservist distributions.