Putting your finances to work
by MAHENDRA S. RATHORE
The Consolidated Appropriations Act, 2023 includes several provisions affecting retirement savings. Specifically, the legislation includes what’s referred to as the” Setting Every Community Up for Retirement Enhancement” (SECURE) Act of 2022 and introduced several changes to retirement and tax-related rules. Here are a few retirement savings and withdrawals tax strategies that might be relevant under the SECURE Act.
Please be aware the tax codes and tax laws can change frequently, so it’s important for the readers to consult with a financial advisor or tax professional for the most up-to-date and personalized advice for their specific situations.
MAXIMIZING RETIREMENT SAVINGS
The revisions relate to catch-up contributions, making student debt payments eligible for matching contributions, the creation of emergency savings accounts, a new saver’s match, and the forthcoming ability to roll 529 plan savings into a Roth individual retirement account (IRA). Take advantage of increased contribution limits to retirement accounts like 401(k)s and IRAs to build tax-advantaged savings.
IRA CATCH-UP CONTRIBUTIONS WILL BE INDEXED TO INFLATION
Previously, Individuals aged 50 and older have long been able to make an additional catch-up contribution of $1,000 to their traditional IRAs and Roth IRAs. The $1,000 limit was a fixed amount. However, starting in 2024, the catch-up contribution will be indexed to inflation, hence future increases to account for inflation will be made in increments of $100. This change means both the IRA/Roth IRA contribution and the catch-up contribution could be raised in any given year depending on inflation and respective breakpoints.
$10,000 CATCH-UP CONTRIBUTION TO EMPLOYER-SPONSORED RETIREMENT PLANS
Workers participating in an employer-sponsored retirement plan like a 401(k) or 403(b) and are aged 60, 61, 62, or 63 will be eligible to make a catch-up contribution of at least $10,000. This increased catch-up contribution goes into effect in 2025.
It’s anticipated the actual amount will be 150% of the catch-up contribution limit for those aged 50 or older starting in 2024. Should the regular catch-up contribution limit stay at its current amount of $7,500 in 2025, it would make the age 60-63 catch-up contribution $11,250 ($7,500 × 150%). The new catch-up contribution will be indexed to inflation after 2025.
HIGHER CATCH-UP CONTRIBUTIONS OF $5,000 FOR “SIMPLE” PLANS
Workers participating in a Savings Incentive Match PLan for Employees (SIMPLE) who are aged 60-63 will be eligible to make a higher catch-up contribution of $5,000 (vs. $3,500 in 2023) or 150% of what the regular catch-up contribution will be in 2025. This increased catch-up contribution also will be indexed to inflation.
HIGHER EARNERS CATCH UP CONTRIBUTIONS MUST BE FOR ROTH
Catch-up contributions made by higher-earning participants in a 401(k) plan or similar employer-sponsored workplace plan must be on a Roth basis starting in 2024. This means catch-up contributions will only be allowed on an after-tax basis. The earnings threshold for this rule is $145,000.
MATCHING CONTRIBUTIONS BASED ON STUDENT LOAN PAYMENTS
Qualified student loan payments can count toward eligibility for employer matching contributions starting in 2024. The loan repayments will be treated similarly to an elective contribution to a 401(k) plan or another similar employer-sponsored defined-contribution plan.
The amount of the match is calculated as if the employee had elected to contribute the loan repayment amount to the plan by payroll deduction, even though the employee’s pay isn’t actually reduced by that amount and the employee doesn’t make any elective contributions to the plan.
The same limits that apply to contributions will apply to student loan payments for the purpose of determining the matching contribution [$22,500 for 401(k)/403(b)/457(b) plans and $15,500 for SIMPLE plans in 2023]. Those limits are based on the cumulative number of elective contributions made by the employee and their eligible student loan repayments.
EMPLOYERS CAN OFFER EMERGENCY SAVINGS ACCOUNTS
Employers will be able to offer emergency savings accounts alongside retirement savings accounts starting in 2024. These accounts would be designated as Roth accounts, meaning they would be funded with after-tax dollars. Up to four withdrawals per year could be taken on a tax- and penalty-free basis.
Employee contributions would be capped at $2,500 or the plan sponsor’s limit. This amount will be subject to inflation adjustments in $100 increments starting in 2025.
ABLE ACCOUNTS: SAVER’S MATCH REPLACES SAVER’S CREDIT
Currently, those with qualifying levels of income are eligible for a tax credit on contributions made to a retirement plan, IRA, or Achieving a Better Life Experience (ABLE) account.
Starting in 2027, this saver’s credit will be replaced by a new saver’s match. The saver’s match is a matching contribution made by the federal government of up to 50% of the first $2,000 contributed to a qualifying retirement account.
529 COLLEGE SAVINGS PLANS CAN BE ROLLED INTO A ROTH IRA
Starting in 2024, up to $35,000 from 529 college savings plans can be rolled over to a beneficiary’s Roth IRA on a tax-free basis. To qualify, the 529 plan must have been funded for at least 15 years ending on the date of distribution, the amount does not “exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the five-year ending on the date of the distribution,” and the rollover is made via a “direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary.”
However, a Roth IRA limit applies. This means the total of IRA/Roth IRA contributions and any 529-to-Roth rollovers cannot exceed the contribution limit for the calendar year. While there are income limits on Roth IRA contributions, there aren’t such limits on 529-to-Roth rollovers.
The maximum Hope Scholarship Credit (the American Opportunity education credit) of $2,500 per year for the first four years of post-secondary education for tuition and related expenses (including books) was made permanent by the Consolidated Appropriations Act of 2016. As such, this credit can be claimed in both 2022 and 2023.
The Lifetime Learning Credit can be claimed for education expenses beyond the fourth year of post-secondary education and for non-degree courses intended to improve job skills. The maximum credit is $2,000 annually and is subject to income phaseouts.
The ATRA made the $2,000 per beneficiary contribution limit to a Coverdell Education Savings Account permanent. The contributions are not deductible, but they grow tax-free in the IRA.
ESTATE TAX EXEMPTION
The estate tax exemption is both portable and indexed to inflation. The exemption is $12.06 million in 2022 and will rise to $12.92 million in 2023. The basic exclusion amount will remain at the higher level through 2025. This is a per-spouse exclusion, and it’s portable, meaning that if one spouse dies, the surviving spouse can claim the deceased’s exclusion, resulting in a total effective exclusion of $24.12 million in 2022 and $25.84 million in 2023.
GIFT TAX EXEMPTION
The annual gift tax exclusion in 2022 is $16,000 and $32,000 for consenting couples. (The IRS says “you probably must file Form 709” for gifts exceeding these respective limits. Spouses may not file a joint gift tax return; each must file their own Form 709.) These limits are indexed to inflation and will rise to $17,000 and $34,000, respectively, in 2023.
FLEXIBLE SAVINGS ACCOUNTS
Workers participating in flexible spending arrangements (FSAs) can carry over up to $570 ($610 beginning in 2023) of unused amounts into the next plan year if their plan sponsor allows them to. Plan sponsors have the choice of either offering employees the ability to carry the amount over or allowing employees a grace period of up to two and a half months to spend it. Dependent care also is eligible for the grace period option but not the carryover option.
HEALTH SAVINGS ACCOUNTS
The 2022 minimum annual deductible for self-only coverage is $1,400; it’s $2,800 for family coverage. These amounts are indexed to inflation and will increase to $1,500 and $3,000, respectively, in 2023. The 2022 maximum limits for annual deductible and other out-of-pocket expenses are $7,050 for self and $14,100 for family. The maximum limits will rise to $7,500 and $15,000, respectively, in 2023.
HSA contributions cannot exceed $3,650 for individual coverage and $7,300 for family high-deductible health care plan (HDHP) coverage in 2022. In 2023, the maximum contributions will be $3,850 and $7,750 for individual and family coverage, respectively.
CONSIDER A ROTH CONVERSION
A Roth conversion allows you to move money from a traditional retirement account to a Roth IRA. This can be a good option if you expect your tax rate to be higher in retirement. Based on your situation you may start converting traditional IRA funds to Roth IRAs strategically, paying taxes upfront to allow for tax-free withdrawals in retirement.
REALIZE A LOSS IN A TAXABLE ACCOUNT
If you sell an investment at a loss, you can use the loss to offset any gains you have realized this year. If you didn’t realize any capital gains or your losses exceed your gains, you can reduce your ordinary income by up to $3,000. The wash-sale rule’s 30-day waiting period applies to stocks and securities.
INVEST IN TAX-ADVANTAGED INVESTMENTS
There are several tax-advantaged investments available, such as municipal bonds, annuities, and life insurance. These investments can help you reduce your tax liability.
The Secure Act allows individuals aged 50 and older to make catch-up contributions to their 401(k)s, IRAs, and other retirement accounts. You can contribute an extra $6,500 in 2023 ($3,000 more than the standard contribution limit).
Utilize Roth 401 (k) and IRA Accounts: Consider contributing to Roth accounts (Roth IRA or Roth 401(k)) to create a source of tax-free income in retirement.
Stretch IRAs for Beneficiaries: Review beneficiary designations and understand how the SECURE Act changed the rules for inherited IRAs. Non-spouse beneficiaries now generally need to withdraw inherited IRAs within 10 years, potentially affecting tax planning.
Annuities in 401(k) Plans: Assess whether your employer’s 401(k) plan now offers annuities as an investment option, providing more retirement income options.
Increase Automatic Enrollment: If you’re an employer, consider implementing automatic enrollment in retirement plans to encourage employees to save more.
Mahendra S. Rathore, MBA, BA (Honors), CHA® CHE® FHCIMA® CTC® CTA® CFP® PMP®, is a former hospitality industry professional having managed luxury, upscale, and extended stay properties. He is a hospitality, investments, and asset-management transformation leader and a subject matter expert with more than 22 years of global experience with fortune 200 companies and leading industry players across the hotels, resorts, and cruise lines, as well as travel and tourism, and wildlife and ecotourism segments. Through his extensive experience in working with leading hotels chains like Taj Group, Marriott, Hilton, and Historic Palace Hotels and Resorts – along with management consulting with the leading industry planers top innovators and disruptors – his keen insights and expertise enable diverse experiences through all lenses of business. Mahendra offers a unique practical experience to help hotel owners to adapt to new challenges, emerging trends, and emerging nuances in hospitality and asset management businesses. He can be reached at (980)318-9327 or by email at [email protected].
The content presented here is to be used solely for informative purposes and should not be construed as advice or recommendation. Individual circumstances vary widely, so it’s essential to consult a financial advisor or tax professional to tailor any strategies to a specific situation. Additionally, tax laws and regulations change, so it’s vital to stay informed. Similarly, estate tax laws and regulations change, so it’s crucial to consult with an experienced estate planning attorney and financial advisor to create a strategy tailored to your specific situation, which follows the most current laws. Estate planning is complex, and professional guidance can help ensure your wishes are carried out effectively.