A recent retirement overhaul was passed by Congress last month.
As a society, many Americans tend not to save enough. Sometimes this is due to circumstances like not having enough income to meet one’s expenses and still having money left to save. (I’m thinking Dave Ramsey would argue the point that people can always save something but if one has a few kids and a low earning job for example, it can be challenging)
Emergency Fund - One change allows an employee to save up to $2,500 in a 401k plan but allows for tax free and penalty free withdrawals if the money is needed for an emergency.
Starting in 2027, to help encourage lower income workers to save for retirement, the government will deposit up to $1,000 each year into their retirement plans.
Required Minimum Distributions - Back in 2019, there was a change increasing the Required Minimum Distribution (RMD) age from 70 ½ to 72. This more recent legislation raises the beginning age to 73. So, if you turn 72 in 2023, you may take your first distribution in 2024. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1 and the second no later than December 31. In 2033, the new required beginning age with be 75.
Bear in mind, one can always take a distribution any time after 59 ½ without a penalty however, your RMD date is the latest you can take a distribution and avoid the penalty.
What appears to be a benefit of this new change could result in more taxes. It is true, you have the option of waiting a bit to take money out of your retirement plan which would save you taxes that year (Money taken from your retirement accounts are taxed as ordinary income) however, since the distribution is based on your age (and the older you are, the higher the percentage that needs to come out), you could see a bigger RMD that could push you in a higher tax bracket.
Rick’s Tip! This option of waiting a bit longer to take a distribution can be a tax planning opportunity. For example, it could allow one the opportunity to do a Roth conversion before additional income from their IRA’s etc are added to the conversion amount along with other income such as Social Security.
Catch-Up provision if over 50 – In 2023, if over 50, you can contribute an extra $7,500 to your workplace retirement plan. In 2025, if one is between 60 and 63, you could contribute an additional $11,250 a year. (These increases can be indexed for inflation so could be higher). For IRA's and Roth IRA's the contribution limit for 2023 is now $6,500 a year or if over 50, it is $7,500.
Part Time Workers – Starting in January of 2025, those working at least 500 hours a year, are eligible to participate in a workplace retirement plan if they have been there for at least two years. This is down from the current three-year requirement.
529 College Savings Plans – These can be a good option for those saving money for their kids or grandkids’ college expenses. Money going into a 529 grows tax free and comes out tax free if used for qualified expenses.
A new provision, after December 31, 2023, will allow a beneficiary that has a 529 plan that is at least 15 years old (The plan, not the child) to roll up to $35,000 of it into a Roth IRA. Only the Roth contribution limit can be rolled in each year and excludes any contributions or earnings that occurred in the last five years.
Rick’s Tip! This can be a great planning opportunity for parents or grandparents especially for one child only families. (Money in 529 plans can be transferred tax free to other siblings or certain other family members). However, if one is an only child and doesn’t need the 529 funds, this allows up to $35,000 of these funds to be rolled to a Roth IRA in their name to provide tax free money in retirement.
Not part of this new retirement package but a pretty cool idea if one has a Health Savings Account (HSA) and is not currently on Medicare.
A once in a lifetime opportunity exists for those that qualify. It is called a Qualified HSA Funding Distribution or QHSAFD (Gotta love those acronyms).
As a primer, an HSA, is an account one can set up that has a high deductible health plan that meets certain requirements. The HSA allows this individual to deposit money to help pay for qualified medical expenses. Unlike an FSA or Flexible Spending Account, the money in an HSA does not need to be withdrawn each year and can stay in the account throughout one’s life.
The limit an individual can contribute in 2023 is $3,850 and $7,750 for a family. If one is over 55, they can contribute an additional $1,000.
An HSA has some unique tax advantages.
- First, you receive a tax deduction for making the contribution
- Second, the money grows tax free
- Third, when taking money out for qualified medical expenses, it comes out tax free
So, where does the QHSAFD come in?
A QHSAFD allows for a once in a lifetime direct transfer from your IRA into your HSA for the maximum allowed amount. For example, Joe is 56 years old, married, and contributes the maximum amount allowed into his HSA for 2023 of $8,750 ($7,750 + $1,000 catch up).
Instead of making this contribution, Joe can transfer this amount directly from his IRA into the HSA and pay no taxes.
Bear in mind, that one does not receive a tax deduction in the year of this direct transfer as one does if making a straight contribution however, it could be beneficial as the $8,750 (plus any potential growth) in this example is removed from Joe’s IRA and reduces his RMD later when those distributions are required from his IRA.
Here's an example. At 56, Joe transfers the $8,750 into his HSA. If the $8,750 was left in his IRA until age 75 (The new RMD age starting in 2033) using a 7% return1, when Joe is 75 (19 years from now) that money could be worth about $31,000 which would be subject to RMD’s at ordinary income taxes at a potentially higher tax rate.
If you are eligible for this strategy, please contact us to discuss as there are certain requirements. It is also recommended to speak to your CPA to see if a particular year would be best. (Such as a low tax year).
There are other provisions in this new law such as Required minimum distribution penalty relief, employer student loan help, charitable contribution of a one time 50k donation through certain channels, and changes to the Saver's Credit.
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
17% is not a guarantee. Investments carry risks and potential loss of principal.
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