Retirement Savings and Tax legislation in the Pipeline

Thu, 10/07/2021 - 9:45am

About this blog:

  • Sarah Ruef-Lindquist, JD, CTFA

    Sarah believes sound, thoughtful planning is a gift we give ourselves, our families and our community.

    She is a lawyer and seasoned non-profit executive who has worked with dozens of organizations, individuals and families as a philanthropic advisor and senior trust officer. She holds the Certified Trust and Financial Advisor certification and FINRA Series 7 and 66 registrations through Commonwealth Financial Network. Sarah and her husband live in Camden. The Financial Advisors of Allen and Insurance Financial are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Allen Insurance and Financial, 31 Chestnut Street, Camden, ME 04843. 207-236-8376.

Last October, I wrote about some of the changes possibly in store for individuals and their income taxes as 2021 approached. Now, a year later, we have a little bit better idea of what MIGHT be in store, but Congress has not yet submitted a bill for the president’s signature.  There has also been some discussion and activity around further modification of laws for retirement savings in addition to those in the SECURE Act from 2019 that would impact how and when people save for retirement, and how those retirement funds are accessed.

We have had a House version and a Senate version produced on the tax laws, and here’s what I’m seeing for possible provisions, based on what I’m reading and hearing from folks in DC who focus on these developing issues:

  • According to an article in Forbes[1], income tax rates will rise modestly, bringing individual tax rates to 39.6% for ordinary income for married individuals who file jointly with taxable income over $450,000, heads of household with taxable income over $425,000, and unmarried individuals with taxable income over $400,000.
  • Maximum capital gains tax rates would also increase from 20% to 25%, for sales that occur on or after Sept. 13, 2021, and will also apply to Qualified Dividends. The present rate of 20% will continue to apply to any gains and losses incurred prior to September 13, 2021, as well as any gains that originate from transactions entered into under binding written contracts prior to September 13, 2021.
  • For IRA owners with large IRA’s, accounts that exceeds $10 million as of the end of a taxable year, no further contributions will be allowed if the owner has taxable income over $400,000, or married taxpayers filing jointly with taxable income over $450,000.

These large IRA owners will be required to make a minimum distribution equal to “50% of the amount by which the individual’s prior year aggregate tradition IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit”. Even more extreme treatment will apply to those who have over $20,000,000 in combined accounts.

A “Secure 2.0” bill has some additional provisions for retirement accounts.  According to www.benefitspro.com[2], for those aged 62-64 with a 401(k), catch-up contributions would increase from $6,500 to $10,000. Similarly, for that same age bracket contributing to a SIMPLE IRA or Simplified Retirement Plan (SEP), catchups would increase from $3,000 to $5,000 per year.

Required Minimum Distributions (RMD’s) are IRS-mandated amount of money that must be withdrawn from traditional IRAs or employer-sponsored retirement accounts each year. The current RMD start age is 72-years old, but this legislation would incrementally increase that age from 72- to 75-years old over the next ten years. A few extra years of tax-free appreciation and income could yield additional funds if the market does well.

  • RMD 73 starting on Jan 1, 2022
  • RMD 74 starting on Jan 1, 2029
  • RMD 75 starting on Jan 1, 2032

The penalties for missing an RMD would also change. Currently, there is a 50% excise tax on withdrawals that do not occur within the specified window. SECURE 2.0 would reduce this penalty to 25%, and only 10% if corrected in a timely manner.

Finally, we wrote last year we were anticipating losing favorable tax treatment for inherited investments. Essentially, we were hearing that the long-standing “step-up in basis” was going away. This would mean that heirs would have to use the tax basis of their benefactor to calculate their own capital gain upon sale of these assets, rather than using the value on the date of the benefactor’s death for basis. This was the “step-up” we had come to use for many years to reduce the impact of capital gains on inheritances. The provision appears to be safe – for the time being – as its removal is not in the most recent versions of proposed legislation.

Be sure to check in with your financial and tax advisors about how these provisions may impact your tax or retirement savings situations. The final versions of the legislation may differ widely from what we have summarized above.

[1] https://www.forbes.com/sites/alangassman/2021/09/16/income-tax-law-changeswhat-advisors-need-to-know/?sh=7170396517ff

[2] https://www.benefitspro.com/2021/09/16/what-americans-need-to-know-about-the-secure-act-2-0/?slreturn=20210904132953