January 13, 2023

As we start the new year, and we wish you a wonderful year, it is an opportunity to look at some year-end “presents” from Congress. This is not a sarcastic or tongue-in-cheek comment. These can be some real presents and the fit isn’t too bad. Here are some “presents” with more general applicability.

For the youngest:

  • For funds that are in a 529 plan that is at least 15 years old, there can be annual ROTH limit rollovers capping at $35,000 lifetime limit. There are some incredible planning opportunities with this change.
  • Employers who start a 401k or 403b retirement plan in 2025 or later will be required to automatically enroll employees for a 3% minimum with a 1% annual increase capping at 10%. Plans created before 2025 are not affected.
  • Unless opting out, when changing jobs an employer can automatically transfer retirement plan balance to new employer’s plan.
  • Starting in 2025, student loan repayments can be considered for employer match to 401k. For the middle:
  • Starting in 2024, if prior year compensation is over $145,000 any “catch up” contributions must go into a ROTH, after-tax account.
  • If you will be 60-63 in 2025 your “catch-up” contribution will go up to over $10,000. This is a maximum 4-year benefit while possibly approaching retirement.
  • The inflation indexing of $1,000 “catch up” contributions starting in 2024 is pretty minor but still something.
  • Hardship distributions of up to $22,000, with income taxed over 3 years, is allowed for disasters after 1/26/21.
  • If under 59 1/2, self-certified emergency distributions of $1,000 which must be paid back with 3 years are allowed. No 10% penalty. No additional amounts can be distributed until repaid.
  • SEP IRA accounts will be allowed to have a ROTH component starting in 2023. There are some changes to SIMPLE plans but those are not as common.
  • Starting in 2023 for newly established Solo 401k plans the initial year 401k portion can be funded after year-end.

For the oldest:

This is where the “presents” are not one size fits all.

  • If you were born in 1950 or earlier your Required Minimum Distribution (RMD) still starts at 72, no change.
  • If you were born between 1951 and 1958 your age for Required Minimum Distributions (RMD) is now 73, up from 72. Another year of tax deferred growth before distributions.
  • If you were born in 1959 or later your age for RMD is now 75.
  • The age for a Qualified Charitable Distribution (QCD) remains unchanged at 70 1/2.
  • A one-time QCD to a charitable remainder or charitable annuity trust, limited to $50,000. Rules on this will be needed as beneficiaries beyond taxpayer and spouse complicate this.
  • ROTH 401k will no longer require RMD starting in 2024. This eliminates the need to do a rollover into a ROTH IRA.

For those who miss an RMD:

  • The egregious 50% penalty for under distribution is reduced to 25% starting in 2023 BUT if error is corrected and tax return is corrected in a timely manner it drops to 10%. Special rules to determine “timely” will be clarified but in many cases, it will be within 2 years.

For the wise:

  • If entertaining a transaction within an IRA that has potential to be “prohibited “, starting in 2023 that transaction can be done from a segregated IRA and not potentially disqualify the other IRA funds.
  • Starting in 2024 a surviving spouse can elect to be treated as employee for purposes of RMD. HOWEVER, for those concerned with asset protection such funds in an ERISA plan may offer greater protection than other options.

And, saving one of the best for last:

Funding a 529 education plan as early as possible made sense before. Now there is a HUGE bow on that present. After a 529 is open for 15 years, up to $35,000 in annual chunks up to the annual ROTH limit can be converted into a ROTH IRA which will grow tax-free. Starting early is now extra important as the last 5 years contributions and income are not eligible for conversion. There are no income limits for converting, just the annual dollar limit. Grandparents (or parents) may want to revisit previous 529 gifting to take advantage of this opportunity.

  • Non-Working Child “Backdoor Roth” Example: 529 plan was funded when baby was born and is now adequate for college.  Now, as college nears, some of the original 529 contributions can be converted to ROTH IRA and additional funds added to a different 529 plan thereby replenishing the balance. 

Please contact us for some very specialized planning with these opportunities.