It is critical to reevaluate your tax strategy when laws, opportunities, and your circumstances change. For the best chance of success for you, I believe it is equally crucial that your advisor collaborate with your accountant and tax attorney. The Tax Cuts and Jobs Act of 2017 and the SECURE Act are two significant improvements that have occurred in recent years.
Tax Cuts and Jobs Act
The majority of people are aware of the substantial changes that this legislation made to the tax system. Don't forget that several provisions of the Act will sunset or expire in 2025, though. The estate-tax exclusion is one provision that is set to expire and will have an impact on high net worth investors. Estates were previously allowed to remove $5.6 million from estate taxes. The amount was raised by the TCJA to $11.2 million, however it expires in 2025.
The SECURE Act
The Secure Act, an important piece of retirement legislation, contains provisions meant to assist businesses in providing retirement programs for their employees and for people to save for their own retirement. Retirement planning has changed significantly as a result of the SECURE Act, which was passed and signed into law in December 2019. The majority of changes benefit investors. However, the removal of the Stretch IRA means that your estate plan will probably need some modification.
Changes to Stretch IRA and Distributions
Traditional IRA beneficiaries had the option to use the Stretch IRA, which allowed them to take distributions as long as they lived. Estate planning frequently included the use of a Stretch IRA. However, unless restrictions apply, the beneficiary is required by the SECURE Act to exhaust the account within 10 years after receiving the inheritance. For instance, spouses, beneficiaries with disabilities, and minors can still withdraw money according on their life expectancy.
New distribution guidelines are also present. If you follow that method, distributions without penalty under normal conditions still start at age 5912. You can now delay taking Required Minimum Distributions (RMDs) until age 72 and keep your money tax-deferred. Your anticipated dividends are listed in IRS tables based on account value and age.
Required Minimum Distributions are absent from Roth IRAs. It is a distinct strategy with various features from a tax perspective. In a subsequent piece, I'll go into detail about how the Roth version works. To ensure that you don't miss it, make sure to sign up for my newsletter.
IRA Provisions
Here are the current provisions governing IRAs:
- No joint accounts are allowed; only those with earned income or alimony may open IRAs..
- If the person joins in a retirement plan at work, their ability to deduct certain amounts may be constrained by their income.
- The following are the deduction limits for anyone taking part in a qualifying plan through their employer:
- Married couples filing jointly are fully deductible up to $103,000 MAGI (Modified Adjusted Gross Income), are not deductible beyond $123,000, and are partially deductible in the range between those two figures.
- Single filers: Deduct contributions in full up to $64,000; beyond that, the deduction phases off and ends at $74,000.
Contribution caps for Roth IRAs are determined by filing status. If the modified adjusted gross income is less than $122,000, Single filers can contribute $6,000; after that, eligibility partially drops down until modified adjusted gross income exceeds $137,000, at which point contributions are no longer allowed. Contributions are allowed for Married Filing Jointly when modified adjusted gross income is less than $193,000 and phase out to zero at $203,000.
- Individuals must be under the age of 70 1/2 in order to establish or make contributions to a regular IRA as of the 2019 tax year.
- The IRA is created in a custodial account or trust for the benefit of the individual.
- Cash or checks are the only acceptable forms of contributions. Stocks and other assets cannot be deposited into the account or transferred therefrom.
- Contribution caps for the 2019 tax year are set at 100% of earned income or $6,000, whichever is less. Contributions can be made up to July 15, 2020. Due to the difficulties in conducting business due to the coronavirus, the tax filing date was delayed. Even if only one partner had a job, married couples may still claim up to $12,000. Those who will be 50 or older in 2019 can make a $1,000 catch-up contribution.
- Investments in collectibles, metals, or life insurance are not permitted. You can invest in publicly traded companies that deal in collectibles or ETFs that contain metals in an IRA, but there are specific restrictions.
- IRAs cannot be used as loan collateral. The pledged sum will then be viewed as a distribution.
401(k) Safe Harbor Changes
An employer match in a safe harbor plan enables the employer to skip the majority of the yearly compliance checks connected to defined contribution plans. Sections 401(k)(11–12) and 401(m) of the Internal Revenue Code (IRC) contain these safe harbor provisions (11). A non-elective safe harbor, a basic safe harbor match, and an upgraded safe harbor match are the three safe harbor provisions that are frequently used.
Eligible employees receive a yearly employer contribution based on a portion of their pay under a non-elective safe harbor. Whether or not the employee makes a contribution to the plan, the employer nevertheless makes a contribution that the employee immediately becomes fully vested in. The employer matches 100% of the first 3% of an employee's contribution to the plan and 50% of the subsequent 2% of contributions under the basic safe harbor match; under the enhanced safe harbor match, the employer matches 100% of the first 4% of an employee's contribution. (Remember that both the basic and enhanced safe harbor matches call for employee participation in the plan.)
The second-year cap on an employee's participation in the plan is raised from 10% to 15% by Secure Act section 102. For plan years beginning after December 31, 2019, this clause will take effect. (The maximum deferral for a participant's first year is 10%.)
Section 103 of the Secure Act modified these safe harbor standards. The act does away with the need for 401(k) programs that accept non-elective contributions to provide early notification (contributions made by an employer that may be, but are not required to be, matched by the employee). In accordance with Section 103, an employer may modify a 401(k) plan to establish a non-elective safe harbor plan as long as the change is made before the 30th day prior to the end of the plan year and takes effect before the end of the following plan year. The non-elective safe harbor contribution increases from 3% to 4% under Section 103.