Two Strategies To Make The Most From The Proposed Retirement Savings Rules

May 2022 ISSUE May 1, 2022
Tax Individual
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The primary goal of retirement planning is to ensure that your money lasts longer than you do! This requires determining the optimal strategy to tap your assets to cover your personal spending needs in retirement. Below we discuss two strategies to help you successfully navigate the more complex retirement savings rules now being considered by Congress.

The House of Representatives overwhelmingly passed the Securing a Strong Retirement Act of 2021 by a vote of 414-5 on March 29, 2022. The bill is now headed to the Senate, where it is expected to pass and be signed into law later this year. The following are the most important provisions that will likely alter your retirement planning.

  • The bill raises the age by which you must begin taking Required Minimum Distributions (RMDs) from your retirement plan and IRAs and pay taxes on those distributions. Currently the IRS requires you to withdraw a minimum amount annually, beginning at age 72, or face a 50% excise tax on the amount you should have taken, but didn’t. To determine your annual RMD, divide your traditional IRA and 401(k) balances as of December 31 by your remaining life expectancy, as listed in the IRS Uniform Lifetime Table. The IRS recently updated this table to reflect longer life expectancies. You can take advantage of the delayed distributions to allow your retirement accounts to continue growing tax-deferred, provided you have sufficient cash flow to meet your personal spending needs.
  • Increases “catch-up” contributions available to your 401(k) plan from $6,500 to $10,000 per year for those age 62-64, beginning in 2024.
  • The bill would pay for itself by raising approximately $36 billion through requiring all catch-up contributions to be made using after-tax funds into Roth accounts, thus foregoing the tax deduction currently available. The catch-up contribution amounts to 401(k) plans and IRAs (currently $1,000 a year) will also be indexed for inflation.
  • Gives participants the option to have matching contributions made on their behalf put into their Roth 401(k), using after-tax dollars.
  • Makes automatic enrollment in newly created 401(k) plans mandatory for employees, starting in 2024. All existing retirement plans are not affected. Employees in new plans with 10 or fewer workers and those in practice for less than three years can opt out. Employers can provide small immediate financial incentives, such as cash or gift cards, to employees to boost enrollment.
  • Allows employers to make matching 401(k) contributions for the benefit of employees paying off student loans who don’t otherwise contribute enough to receive the full match.
  • The tax credit for starting a retirement plan(s) is increased from 50% of start-up costs to 100% for practices with up to 50 employees. An additional credit is available, equal to a percentage of the amount contributed by the practice, up to a maximum of $1,000 per employee. The percentage would be 100% of the employer contribution in the first 2 years, 75% in the third year, 50% in the fourth, 25% in the fifth year, and none thereafter.

While delaying distributions and the related taxes sounds like a great idea, it could actually mean paying higher taxes in the future without proper planning, since you’ll be withdrawing more money over a shorter time period once RMDs kick-in.

Though the new law complicates withdrawing funds from your retirement accounts, you can take advantage of the following two strategies to reduce future taxes:

  1. Increase Post-Sale Roth Conversions – Use the longer time period before RMDs kick in to convert larger amounts from your regular IRA into your Roth IRA. While taxes are due on the conversion amount, they can be minimized by converting in lower income years following your practice sale, using our optimal retirement funding strategy.

By moving money into a Roth, your taxable retirement accounts will be smaller. And when RMDs begin, the withdrawals, and related taxes from those accounts, will also be lower.

This strategy can also benefit your children. By moving more money into your Roth IRA, you’re eliminating income taxes on the growth for yourself, as well as your children.

  1. Increase Qualified Charitable Distributions (QCDs) – Doctors age 70 ½ or older who are charitably inclined can use a popular tax break to donate to charity, reduce their retirement account balance, and also lower their future RMDs. You can make QCDs of up to $100,000 annually from your regular IRA directly to charities. While you’ll receive no income tax deduction for the donation, the withdrawal doesn’t count as income, which can help reduce future income taxes and income-based Medicare premiums. You can receive these tax advantages regardless of whether you itemize or claim the standard deduction in retirement.

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