As we approach this Thanksgiving, the third since COVID-19 hit us, we may find it harder to be grateful than we would like. The economic news is not and has not been great, and the rumblings indicate that the numbers aren’t going to get much better in the near-term. However, although we are in a recession, the economic indicators point toward a slower increase of interest rates by the U.S. Federal Reserve, and suggest that inflation is – slowly – being tamed.

While the impact of COVID has been largely mitigated by vaccines, boosters, and natural immunity, we are experiencing an early start to flu season, with cases surging throughout the United States, and other respiratory viruses rearing their heads as well.

But there are always reasons to be thankful if we look for them.

If we and our loved ones have survived the past three years, that’s an enormous reason for thanksgiving.

We’re looking forward to a traditional Louisiana Thanksgiving feast at my parents’ home – and I’m grateful for that, as there are many people who lack enough to eat.

My daughter graduated from college this year – I couldn’t be prouder of her (nor could her mother), and Jennifer and I are so grateful to have raised and experienced this lovely, gifted, achieving young lady.

I am thankful to have been smart enough to choose a magnificent life-partner in Jennifer, and even more that she accepted my heart and hand.

I’m grateful to my parents, who raised me with good values and provided me with excellent role models.

JazzFest’s triumphant return this past April, following the festival’s cancellation in 2020, its postponement and eventual cancellation in 2021, is another reason I’m thankful this year – and I’m sure a lot of you feel the same.

I’m thankful for New Orleans, the beautiful city where I make my home, and for its wonderful sense of community, which rears its lovely head at the unlikeliest moments. For the dear friends who enrich my life immeasurably.

So, this Thanksgiving, I’ll celebrate with a full and humble heart, mindful that my blessings are many, and that there are those less fortunate among our community.

And I will strive to carry that mindful, grateful humility into the New Year, working toward becoming the best version of myself, and making my home, my family, and my community even better places to live.

What will you be giving thanks for this year?

Please click here to email me directly – I’d love to know what’s on your gratitude list.

Until next Wednesday –

Peace,

Eric

In our last post on retirement planning, we discussed the IRS’ proposed changes to the payout structure of inherited IRAs, which would go against the provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

Today, we are going to discuss the existing rules – the three categories of beneficiaries, and the payout rules applicable to each category, as provided by the SECURE Act and existing IRS rules.

Eligible Designated Beneficiaries:

An eligible designated beneficiary can be any of the below:

  • The deceased account owner’s spouse.
  • A disabled beneficiary.
  • A chronically ill beneficiary.
  • A beneficiary not more than 10 years younger than the deceased account owner.
  • A minor beneficiary who is the child of the deceased account owner (the 10-year distribution rule will only become effective when the beneficiary reaches the age of majority).

Some options are available only to a surviving spouse:

For traditional IRAs (including rollover IRAs, SEP IRAs, and SIMPLE IRAs)

  • Spousal Transfer. A surviving spouse who is the original account owner’s sole beneficiary can treat the account as his or her own, rolling it into an existing IRA, or setting up a new one. Assets will continue to grow on a tax-deferred basis, and can be available at any time – subject to the 10% penalty for withdrawals made by the new account owner if under 59½ at the time of the withdrawal. The new account owner must designate his/her own beneficiary.
  • Open an Inherited IRA – Life Expectancy. Opening an Inherited IRA in the beneficiary’s name is available to all eligible designated beneficiaries, with one significant provision for surviving spouses alone, if the original account owner was under the age of 72 at the time of his/her death. In this case, required minimum distributions (RMDs) can be deferred until December 31 of the year in which the original owner would have turned 72. These RMDs are based upon the life expectancy of the new account owner, and are not subject to penalty, no matter the age of the surviving spouse. The surviving spouse need not be the sole beneficiary of the original account, but if there are more beneficiaries than him/herself, separate accounts for all beneficiaries must be established by December 31 of the year following the year of death in order for the spouse to be able to elect distributions based on his/her life expectancy. Otherwise, distributions will be based upon the life expectancy of the oldest beneficiary.

For Roth IRAs, both the spousal transfer and inherited (Roth) IRA options remain – but if the surviving spouse transfers the Roth IRA into his/her own IRA rather than into an inherited IRA, the assets must be held for five years and until the new owner turns 59½ before tax- and penalty-free withdrawals can be made.

For non-spousal eligible designated beneficiaries – though surviving spouses can elect these as well, the options for traditional IRAs are:

  • Inherited IRA – Life Expectancy. If the original account owner died before reaching age 72, RMDs will be based upon the beneficiary’s life expectancy, determined by his or her age at the time of the account owner’s death and reevaluated yearly. RMDs must be taken annually, beginning no later than December 31 of the year following the death; these withdrawals are taxable, and are not subject to the 10% early withdrawal penalty. However, if the original account owner was 72 or older at the time of his/her death, RMDs can be based upon the deceased’s life expectancy, if longer than the beneficiary’s (if the deceased did not take an RMD in the year of death, an RMD must be taken by December 31 of that year). Note that for an eligible designated beneficiary who is the minor child of the deceased, the life-expectancy option ceases to be available when the child reaches majority – at that point, the beneficiary must switch to the 10-year method (see below).
  • Inherited IRA – 10-Years. At present, the assets transferred into the Inherited IRA under the 10-year method are not subject to RMDs. However, all assets held in the Inherited IRA must be distributed by December 31 of the 10th year following the original account owner’s death. Distributions are taxable, but are not subject to the 10% early withdrawal penalty. Note that this option is not available to eligible designated beneficiaries if the original account owner was over 72 at the time of death.
  • Lump Sum Distribution. Any eligible designated beneficiary of a traditional IRA can elect to have the entire account (or their portion of it) distributed to them without transferring the assets first. The distribution is taxable, but not subject to the 10% penalty.

For inherited Roth IRAs, all three options above are available:

  • Inherited Roth IRA – Life Expectancy. With this option, RMDs are mandatory; these distributions must be taken beginning no later than December 31 of the year after the year of the original account owner’s death. The RMDs are spread over the life expectancy of the beneficiary. In the case of a minor child, this option is available only until the child reaches majority, at which point the beneficiary must switch to the 10-year option. In the case of multiple beneficiaries, again, separate accounts must be established for all beneficiaries by December 31 of the year following the original account owner’s death in order for beneficiaries to use their own life expectancy measure for RMD calculation. If such accounts have not all been established by then, the decedent’s life expectancy will be used to calculate the RMDs.
  • Inherited Roth IRA – 10-Year. A beneficiary electing this option is, under current rules, not required to take RMDs, but must fully distribute the entire account by December 31 of the 10th year following the original account owner’s death.
  • Lump Sum Distribution. All assets in the Roth IRA will be distributed to the beneficiary. Assuming the assets were held for 5 years or more in the account, distributions will be tax free. Otherwise, tax will apply only to the account earnings, not to the original owner’s contribution amounts.

Note that for beneficiaries inheriting Roth IRAs, providing the assets in the account were held for 5 years or more in the Roth IRA, all distributions are tax free to the beneficiaries. If the holding period is less than 5 years, distributions representing earnings on the original investment(s) are taxable, but withdrawals representing the amounts initially invested by the original account owner remain untaxable. Distributions are also not subject to the 10% penalty.

Designated Beneficiaries:

These beneficiaries are individuals who do not qualify as eligible designated beneficiaries. Certain trusts also qualify as designated beneficiaries, providing the trust is considered a pass-through entity, paying out from the inherited IRA to the trust’s beneficiaries and not holding any of the assets within the trust.

Designated beneficiaries must take distribution of the IRA’s assets no later than December 31 of the 10th year following the original account owner’s death. Distributions from traditional IRAs are taxable but not subject to the 10% penalty. Roth IRA distributions are tax free, provided the assets were held in the original Roth IRA for 5 years or more. If the Roth IRA’s assets were not held for that length of time, again, only distributions on earnings are taxable, not distributions of original investment amounts.

“Not Designated” Beneficiaries:

Generally speaking, these beneficiaries are entities, not individuals. With the exception of pass-through trusts which do not hold any of the inherited IRA’s assets, any non-individual beneficiary, including other trusts, estates, and charitable organizations, is considered “not designated.”

The SECURE Act did not change the rules governing such entities in relation to their inheritance of IRAs:

  • Traditional IRAs. For traditional IRAs whose original owner dies before s/he was required to take RMDs, the beneficiary entity must distribute the entire account balance by December 31 of the 5th year following the death. If the account owner was subject to RMDs at the time of death, distributions are made using the decedent’s life expectancy.
  • Roth IRAs. All account assets must be distributed by December 31 of the 5th year following the original account owner’s death.

Distributions from traditional IRAs are taxable but not subject to penalty.

Distributions from Roth IRAs are not taxable, providing the original assets were held in the Roth IRA for at least 5 years.

If you intend to leave an IRA or IRAs to beneficiaries, or know you will inherit, and have questions as to how to best structure your planning, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

During the first year of the pandemic, in the spring of 2020, I wrote about my own experience of remote work for myself and my team, and it seems that, indeed, some form of remote work is, in fact, going to remain part of our “new normal.”

On August 31, 2022, Gallup released the results of a survey of 8,090 U.S. employees whose jobs can be performed remotely (a full 56% of full-time U.S. workers fall into this category). The survey explored:

  1. Whether these employees were currently working remote-only, a hybrid of remote and in-office, or in-office only,
  2. Where they a) expected to work and b) preferred to work long-term, and
  3. What would their reactions be to not being permitted to work in their preferred location(s).

The results:

On question 1:

  • ~50% of remote-capable employees are working via a hybrid arrangement, remote some days and in-office on others.
  • ~30% are working entirely from home.
  • ~20% are working onsite-only.

On question 2:

  • Hybrid work is increasing – from 42% of employees capable of working from home in February of this year to 49% in June of 2022 and is expected to further increase to 55% by year-end. This aligns reasonably well with workers’ preferences, as 60% prefer a hybrid work scenario.
  • Fully remote work, on the other hand, is expected to decline, from 30% in June 2022 to 20% by year-end. This is less well-aligned with employees’ preferences, as 34% of them want a permanent remote-work solution. However, it’s important to note that fully remote positions, even at the lower rate, would be roughly triple the number they represented in 2019.
  • The 20% of workers who never work remotely is expected to be unchanged – while a mere 6% of survey respondents want such positions long-term.

The key takeaway here is that 94% of U.S. full-time employees who can work remotely want to have that option represent at least part of their work schedules.

On question 3:

Those who can and want to incorporate remote work into their schedules but must perform their jobs full-time at their employers’ offices report:

  • An increasing intent to look for a more flexible position elsewhere
  • An increasing sense of burnout
  • A decline in their life-satisfaction
  • A decline in feeling engaged with their jobs

Employers should take note – the above are all significant increases from June 2021 in worker sentiments.

Some of the benefits of remote work apply to both employees and employers – a team member who is spared a long commute may have more energy to focus on their work, for example.

There are financial benefits for both, too – a pre-COVID study by GlobalWorkplaceAnalyics.com estimated the typical employer could save up to $11,000 annually per remote employee – based on 20 hours per week in the office, and 20 hours of remote work.

For employees, working remotely for 20 hours out of 40 could provide savings of ~$2,500 – $4,000 per year. The same schedule saves the equivalent of approximately 11 workdays per year in commuting time.

Given the current economic climate, these savings (which are probably considerably higher as dollar figures today than pre-COVID) seem even more persuasive as factors in our decision making than they were in 2021.

For employers, allowing for remote work, at least part-time and/or for specific positions, also allows access to a much larger base of talent than limiting themselves to local hires. You have the whole country – the whole world – to choose from.

In addition, less time in the office for team members means (let’s be realistic) less time spent on the inevitable non-work-related chit-chat. However, this can be a two-edged sword, as less chit-chat also means less organic team building, which could in turn lead to less effective communication among team members.

Some of the benefits of remote work may have downsides, too – e.g., parents of small children may find they face more distractions working at home than at work, rather than fewer.

Closely held businesses often have an advantage over larger, more red-tape-heavy firms in their ability to offer their teams the flexibility of remote work, at least part of the time, which may induce key team members to stay in place, rather than seek opportunities elsewhere.

If you have questions on how to handle and balance your employees’ needs and wants with the requirements of your business, please click here to email us directly – we are here to help.

Until next time –

Peace,

Eric

Even the darkest clouds can have a little silver lining them. Last week, we discussed the IRS’ inflation adjustments for 2022 taxes.

And with the issuance of Revenue Procedure 2022-38, the IRS has announced inflation-adjusted tax brackets, standard deductions, estate exemptions, and more for 2023.

Income Tax Brackets – 2022 – 2023:

Other Increases:

  • The standard deduction is also increased – for individuals, to $13,850 for 2023 from $12,950 for 2022; for married joint filers to $27,700 from $25,900 for 2022.
  • The annual gift tax exclusion will rise to $17,000 from 2022’s $16,000 limit.
  • The estate tax threshold will increase to $12,920,000 per individual from $12,060,000 in 2022.
  • The Alternative Minimum Tax (AMT) exemption for 2023 is $81,300 for individuals and $126,500 for married couples filing jointly, up from $75,900 and $118,100, respectively, for 2022. Phasing out begins at $578,150 for individuals and $1,156,300 for married joint filers, compared with $539,900 and $1,079,800 in 2022, respectively.
  • The foreign earned income exclusion is $129,000 for 2023, up from $112,000 for 2022.

These, of course, are only some of the significant changes the IRS has announced for 2023. Most tax credit limitations have been increased for 2023, though some items are by statue not indexable to inflation.

There may be opportunities to leverage these increases to find you ways to keep even more of your hard-earned money – consult with your CPA/financial planner to develop the best strategy (or strategies) for you and your family.

If you are interested in developing new tax planning and estate strategies for 2023, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

To Our Valued Clients and Friends:

While there hasn’t been a lot of good economic news of late, one small ray of sunshine is that the IRS has made inflation-based adjustments to the standard deduction and to the income thresholds for the various tax brackets.

Revenue Procedure 2021-45 provides the 2022 income tax bracket threshold changes shown below.

Income Tax Brackets – 2021 – 2022:

Other Increases:

  • The standard deduction rises – for individuals and married taxpayers filing separately to $12,950 for 2022, up $400 from 2021’s $12,550 for 2022; for married joint filers to $25,900 in 2022, up $800 from $25,100 for 2021. For heads of households, the deduction for 2022 is $19.400, up $600 from 2021’s $18,800.
  • The annual gift tax exclusion for 2022 will rise to $16,000 from 2021’s $15,000 limit.
  • The estate tax threshold increases to $12,060,000 in 2022, up from $11,700,000 for 2021.
  • The Alternative Minimum Tax (AMT) exemption for 2022 is $75,900 for individuals and married taxpayers who file separately, and $118,100 for married couples filing jointly, up from $73,600 and $114,600, respectively, for 2021. Phase-out begins at $539,150 for individuals and married separate filers, and at $1,047,300 for married joint filers, compared with $523,600 and $1,047,200 in 2021, respectively.
  • The foreign earned income exclusion is $112,000 for 2022, up from $108,700 for 2021.

These, of course, are only some of the important changes the IRS has made for tax year 2022. Most tax credit limitations have been increased for 2022.

Incorporating these increases into your tax planning may uncover other ways to help you minimize your income tax liabilities even further – consult with your CPA/financial planner to develop the best strategy (or strategies) for you and your family.

If you are interested in developing new tax planning and estate strategies for 2022 – or for 2023, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

Last time, we talked about the ways CPAs/financial planners are working with qualified retirement account owners to mitigate the effects of the SECURE Act’s changes to the distribution rules for inherited IRAs and other qualified retirement accounts.

Today, we are going to talk further about inherited retirement accounts, in light of the IRS’ proposed changes to the SECURE Act’s alterations to those distribution rules.

To recap, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), signed into law in December of 2019 and effective as of January 1, 2020, required most beneficiaries of inherited retirement accounts whose original owner passed away after December 31, 2019, to withdraw the entire inherited balance within 10 years of the original account owner’s death. Previously, any beneficiary of such an account could stretch required minimum distributions over their lifetimes, a prerogative the SECURE Act limits to:

  • The deceased account owner’s spouse.
  • A disabled beneficiary.
  • A chronically ill beneficiary.
  • A beneficiary not more than 10 years younger than the deceased account owner.
  • A minor beneficiary who is the child of the deceased account owner (the 10-year distribution rule will only become effective when the beneficiary reaches the age of majority).

The SECURE Act’s 10-year distribution mandate eliminated required minimum distributions (RMDs) for those beneficiaries who were now required to fully deplete the IRA in a 10-year window.

Those beneficiaries who are eligible to take distributions over their lifetimes can also elect to be bound by the 10-year rule.

However, as Congress considers further changes to the rules in the Securing a Strong Retirement Act (known as SECURE 2.0), a version of which passed in the U.S. House of Representatives in March of 2022, the IRS does what it does most and best – meddles.

The IRS proposes to require beneficiaries who don’t qualify for one of the exceptions (see above) to the 10-year distribution rule, or who elect the 10-year rule, to take RMDs themselves during each of the first nine years after inheriting the IRA, as well as making sure it is fully distributed within the 10-year period after death, if the original account owner had begun taking RMDs.

This could potentially result in hefty tax liabilities for those beneficiaries who, relying on the SECURE Act and the IRS’ own prior guidance, did not take an RMD in 2021 (RMDs were waived for 2020 due to the COVID pandemic, but this waiver was not extended). We would expect that the IRS would, if the new proposed regulations are approved this year, waive any tax penalty for 2021.

Other potential changes in SECURE 2.0 which could impact a significant number of taxpayers are:

  • Delaying RMDs. The original SECURE Act increased the age at which workers are required to start making withdrawals from their retirement accounts from 70 to 72. SECURE 2.0 would increase it once again: To 73 by 2022, to 74 by 2029 and finally to 75 by 2032. The point of RMDs is to give the U.S. Treasury the chance to start collecting tax revenue from tax-deferred savings, and keep them from becoming an estate planning device. Many Americans happily take their RMDs to cover living expenses, and the extra three years would primarily give wealthy retirees who don’t rely on RMDs for income more time to avoid tax liabilities.
  • Expansion Of Catch-Up Contributions. Increasing the annual catch-up amount to $10,000 for participants ages 62 through 64 beginning in 2023. This higher limit would be indexed for inflation for future years.

Since 2022 is drawing to a close, some beneficiaries who have inherited IRAs may want to take an RMD this year just as a precaution. Be assured we will monitor this volatile topic to provide further information as it emerges.

There is nothing like the IRS waiting until the last moment possible to propose changes.

If you are concerned about the impact of the SECURE Act, the potential SECURE 2.0 Act, and/or the new proposed IRS regulations could affect you, your loved ones, and your retirement/estate planning, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

In our last post, we talked about the 2022 limits on contributions to qualified retirement accounts and plans.

This time, we are going to take a more in-depth look at the end, for most beneficiaries, of the “stretch” IRA, which we’ve previously touched on here and here, and the ways savvy financial planners are finding around the consequences of this change to protect their clients’ assets.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), signed into law in December of 2019 and effective as of January 1, 2020, eliminated the option of most individuals who inherit an IRA from taking distributions over the course of their lifetimes, and instead requiring full distribution within 10 years of the inheritance’s date.

Exceptions – those beneficiaries for whom the lifetime-distribution rule remains in force:

  • The deceased account owner’s spouse.
  • A disabled beneficiary.
  • A chronically ill beneficiary.
  • A beneficiary not more than 10 years younger than the deceased account owner.
  • A minor beneficiary who is the child of the deceased account owner (the 10-year distribution rule will only become effective when the beneficiary reaches the age of majority).

For all other individual beneficiaries, the new 10-year distribution rule will apply.

This has thrown a monkey wrench into a great number of retirement/estate plans, as many owners of IRAs have planned to leave their retirement assets to adult children as a vehicle for transferring tax-deferred assets with a long timeframe for distributions to their heirs. The longer time-frame allowed the inherited assets to grow (often) over several decades.

But CPAs and financial planners have been busy devising creative strategies to work around this new rule, preserving as large a portion of the assets as possible for the intended heirs.

These include:

  • Converting the IRA into a Roth IRA. When an IRA owner converts to a Roth IRA during his/her lifetime, s/he will be responsible for income tax on all assets converted. However, those assets will accumulate tax-free through the account owner’s lifetime, and Roth IRAs are not subject to the RMD rules – the original owner of a Roth IRA can pass the account in entirety to a beneficiary or beneficiaries. An adult beneficiary ineligible for the “stretch” distributions can allow the assets to accumulate if s/he chooses, but must withdraw the entire account balance within 10 years of the original account owner’s death.
  • Purchasing additional life insurance. Wealthier retirees and near-retirees who do not need the income from their qualified retirement accounts’ required minimum distributions (RMDs) can use these funds to pay the premiums on a life insurance policy of roughly the value of their qualified retirement account(s). If structured properly, the proceeds of life insurance policies can be excluded from the insured’s estate and the proceeds will be tax-free to the life insurance policy’s beneficiary or beneficiaries.
  • Taking the life insurance strategy a step further, an irrevocable life insurance trust (ILIT) can be set up to own and hold the policy until the insured’s death, and distribute the proceeds thereafter. For 2022, this is probably of greatest benefit to individuals whose estates may exceed the current tax exemption of $12.06 million (per individual), as using an ILIT means the value of the policy is not included in the valuation of the decedent’s estate. But it’s important to remember that without Congressional action, the estate tax exemption will revert to $5 million per individual, adjusted for inflation, at the beginning of 2026.
  • Speaking of trusts, another vehicle for transferring retirement and other assets might be a charitable remainder trust (CRT) to hold the IRA. These are irrevocable, split-interest trusts, providing income to the original account holder and designated beneficiaries for up to 20 years or the beneficiaries’ lifetimes. Remaining assets must be donated to charity – these must represent at least 10% of the trust’s original value. The charity in question will distribute the IRA on the account owner’s death, and the portion of the assets which will go to charity provide the estate with a charitable deduction in that amount. The retirement assets held in trust continue to grow, with taxes paid by beneficiaries on their distributions.
  • Investing RMDs in a taxable brokerage account. There’s the potential for higher growth from the RMDs if properly invested and allocated in a brokerage account according to the account owner’s needs. In addition, heirs pay capital gains taxes on withdrawals on a stepped-up basis, i.e., the value of the assets at the time of the account owner’s death or as of the alternative valuation date, which is six months following that death, rather than the valuation at the time of purchase.

There are other strategies, but these are the ones which will be of greatest use to most.

Which one, or ones, are right for you? We encourage you to consult your CPA/financial planner, to devise an individually tailored plan – one that is designed with your goals for your lifetime and beyond in mind, to protect the assets you’ve worked so hard to accumulate for yourself and those loved ones you want to benefit from them. S/he is uniquely equipped to perform this service for you, and will listen and understand your needs and your unique vision.

If you think your retirement/estate plan may have been impacted by the SECURE Act, please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

Our last post discussed several factors to bear in mind to ensure a happy retirement.

This week, since it is by no means too early for tax planning, we talk about the 2022 limits on contributions to retirement plans.

  • IRAs – Traditional and Roth: the 2022 annual contribution limits remain unchanged at $6,000 for those under 50, while those age 50+ can contribute an additional “catch-up” of $1,000 per year, for a total contribution limit of $7,000. Note that this limit applies to all IRAs held by a single taxpayer, not each individual IRA – i.e., if you want to contribute to two or more of your IRAs in one year, the total amount contributed to all IRAs cannot be more than the limit for your age (either $6,000 or $7,000).
  • SEP IRAs – the contribution limit for 2022 (made by the employer on behalf of an employee or employees) is the lesser of 1) 25% of the employee’s compensation, or 2) $61,000 per employee (an increase from the 2021 limit of $58,000), with an adjustment for 50% of the self-employment tax. No catch-up contributions are permitted.
  • Employer-sponsored retirement plans – the 2022 contribution limit for 401(k), 403(b), and most 457 plans is increased from $19,500 to $20,500 for employees under 50. For those over 50, a catch-up contribution up to $6,500 annually is permitted – assuming your employer-sponsored retirement plan permits catch-up contributions.

We would recommend contributing the full amount available to you into whatever retirement account(s) you own.

Further, we recommend checking into all retirement options available through your employer – public schools, colleges, universities, churches, hospitals and other tax-exempt organizations may offer more than one option, including 401(k), 403(b), and/or 457 plans, and may also allow you to participate in and contribute to more than one employer-sponsored plan – e.g., offering you both a 401(k) and a 403(b) plan.

If you have both a 401(k) and 403(b) plan account, be aware that the total annual contribution to employer-sponsored retirement plans is $20,500 for 2022 – or $27,000 if you are over 50. However, it may be useful to have more than one employer-sponsored plan account, especially if one or more of the plans does not allow catch-up contributions. In such a case, you can contribute the amount of your catch-up to the second retirement plan account – the IRS permits you to treat this additional contribution as a catch-up for their purposes, even if your plan does not.

However, if your employer offers you both a 401(k) plan and a 457 plan, a deferred compensation plan, you can contribute $20,500 to each plan in 2022, not counting catch-up contributions. If you have this option available, you can contribute up to $54,000 tax-deferred for 2022, if you are over 50 – $20,500 plus $6,500 to each plan account.

We invite you to consult with our CPAs/financial planners for advice on how to maximize your retirement assets, reduce your tax liabilities, and plan for the retirement you want to look forward to.

Please click here to email us directly – let us know how we can help.

Until next time –

Peace,

Eric

Last time, we talked about planning for the income taxes you will incur during your retirement.

In this post, we talk about how best to ensure – to the extent possible – that your retirement is a happy and enjoyable one.

It’s indisputable that a happy retirement needs a number of working parts to keep it going, and the top factors retirees note have remained relatively stable since 2014. A large financial firm’s study found 5 top components, among which health was overwhelmingly in first place. Other research indicates additional important factors in a happy retirement, so we discuss our own top 3 picks below.

Top Non-Financial Criteria for a Happy Retirement

Good Health – Physical and Mental

Good health is at the top of every list of what retirees consider paramount to maintaining a happy retirement. Some ideas on how to care for yours:

  • Eat a healthy diet – you will both feel better and be better in health for it. Whether you prefer plant-based or paleo, veggies and fruits should be part of your daily diet.
  • Exercise regularly – whether it’s walking, running, bicycling, or gym workouts, keep (or get) moving! If walking is all you are able to do, take 7,500 steps per day – this will produce health benefits both physical and mental.
  • Note that it is never too late to start on the above – studies indicate that even previous couch-potatoes with less than healthy diets can, by taking corrective steps – even later in life – dramatically reduce their chances of cardiovascular illness, and live longer.
  • Don’t ignore physical or mental symptoms – make your health-care providers your partners in maintaining your all-important health.
  • Your mental health is every bit as important as your physical health – especially when it comes to happiness. Exercise your mind as regularly and diligently as you do your body. Keep learning! Brain exercise may help you avoid cognitive decline and reduce your risk of Alzheimer’s and other causes of dementia. Consider reading – books, articles, papers – these can help keep your information as well as your mind up to date.
  • According to Harvard Medical School’s newsletter, Healthbeat, “Challenging your brain with mental exercise is believed to activate processes that help maintain individual brain cells and stimulate communication among them.”
  • One key factor in happiness and mental health is a positive outlook – cultivate optimism, as The Kinks advise us in their song Better Things. The glass is partly full and partly empty – which you focus on is up to you. Practice mindful gratitude – you are blessed, if you think about it – we all are.

A Strong Social Network

While working, you have a built-in social network. But, although you may maintain friendships with some former colleagues, it’s likely that that portion of your circle of acquaintance will diminish – in both quantity and importance, as you find other activities. Per one Gallup poll from 2011, U.S. citizens report improvement in their moods for every hour of social activity, up to 7 hours a day. Seniors, as a rule, derive full benefit with even fewer hours of social time. To keep a strong social life:

  • Unplug. The benefits of social interaction do not attain to social media – invest in in-person time.
  • Make time for each relationship you value – your spouse, each child, every close friend. Spend quality time with them one-on-one.
  • Gather in groups – now that you have time for that favorite hobby (or time to take one up), join with those who share your passion. If you’re an avid reader, join a book club – or start one! Remember, as unique as each of us is, there are a finite number of things in this world, and if you love something (collecting anything, reading, needlepoint, cycling, extreme sports), you aren’t the only one!
  • Take part in community events – go to that museum-unveiling party, that charity ball.
  • New neighbors? Bake them cookies and bring them over with an invitation to stop by (on a specific date and time) for coffee and to chat. Maybe you won’t take to each other, but you won’t know if you don’t try.

A Sense of Purpose

Work is one clear purpose – but it’s a long way from the only purpose, and the others – your relationships among them – you can carry with you into retirement. But you can also find new purposes to pursue in your newly available time, if family and friends, leisure, travel and recreation don’t fill the bill for you:

  • Volunteer – chances are there are many worthy opportunities for you to give back to the community in which you’ve prospered – or the new community you’ve moved to (volunteering is a great way to find new friends). The Merrill Lynch study linked to above found that retirees are three times as likely to reference “helping people in need” as boosting their happiness than “spending money on themselves.”
  • Consider mentoring a young person in need of guidance – that’s an excellent way of helping others.
  • Start a new business, if you find yourself missing your work-life too much.
  • Take up a part-time job doing something new – one client of ours became a docent in retirement and gained much satisfaction from it.

If you are wondering how to best plan for your own happy retirement, and would welcome the counsel and perspective of a seasoned financial planner, please click here to email us directly – we are here to help.

Until next time – 

Peace,

Eric

Our last post concerned whether to convert your IRA to a Roth IRA.

This week, we talk about your income taxes in retirement. It’s almost as important to plan for these tax expenses as to plan for your income when you begin this new stage of your life.

Indeed, every factor affecting your retirement plan needs to be identified and taken into account long before you cease working – and that includes the income taxes you will have to pay when you are no longer earning a salary.

While your tax bracket may be lower in retirement than during your working years, not every portion of your post-retirement income will necessarily be taxed at the same rate. For example, funds withdrawn from a non-qualified brokerage account would be taxed at long-term capital gains rates, rather than at regular income tax rates.

Consider the following hypothetical case – Mary plans to retire in 5 years; she expects to have income available from the following sources:

  • A 401(k) plan from her most recent employer, into which she rolled 401(k) plans from her last two employers.
  • A Roth IRA, which she converted from a traditional IRA in 2016, paying the full income tax amount due upon conversion.
  • An annuity she purchased.
  • Social Security.
  • An individual brokerage account.

Federal taxation would be as follows:

  • Distributions from the 401(k) plan would be taxed at the ordinary rate tied to Mary’s overall taxable income.
  • Withdrawals from her Roth IRA would be tax free, assuming as we have that she made the conversion 5 years or more before she begins distributions.
  • Withdrawals from the annuity would be taxed at ordinary rates until Mary has exhausted the initial investment amount’s earnings (by law, earnings are to be withdrawn first). Later withdrawals of her original investment amount are not taxable.
  • Social Security income is taxed depending on Mary’s combined income and her filing status. Assuming Mary is widowed and therefore filing as a single individual, she will add her adjusted gross income, her non-taxable interest, and half of her Social Security income. If the total of the aforementioned items is over $25,000, taxes may be due on up to 50% of her Social Security income. If her combined income is over $34,000, she may have to pay taxes on up to 85% of her Social Security income.
  • With her non-qualified-retirement assets, Mary need not pay taxes on every dollar she withdraws. Taxes are due only on such withdrawn funds as result from capital gains, interest, and dividends, since the investments were made with post-tax dollars. Withdrawals, assuming she has held these investment positions for over a year, will be taxed on the long-term capital gains of the asset(s) sold. Capital Gains are currently subject to an effective top tax rate of 23.8% – if Mary’s taxable income is subject to the top capital gains tax rate of 20% and the 3.8% net investment income surtax levied on single individuals with adjusted gross income (AGI) of over $200,000 and on married joint filers with AGI over $250,000 (married individuals who file separately have an AGI limit of $125,000). However, Mary’s capital gains may incur a rate as low as 0%, depending on her actual income in a given year – for 2022, she would be subject to 0% capital gains taxes if her single-filer taxable income were under $41,675, or $55,800 if she qualifies for head-of-household status.

Of course, there are additional potential sources of income – and potential tax savings.

For example, long-term capital gains can sometimes be wholly or partially offset by long-term capital losses before taxes are calculated.

Some states attract retirees with a no-state-income-tax policy – these are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Moving to one of these states could completely eliminate the need to pay state income taxes. Other states have very low income tax rates, and/or low sales tax and property tax rates. If you are thinking of a move when you retire, these are facets to consider – though ultimately your plan needs to fit all your retirement needs, and these should not be solely financial goals.

Your CPA/financial planner can help you project your estimated tax rates in retirement year-by-year, and assist in planning how to fund your retirement – not merely calculating the amount of income you need annually, but where and when to take that income from.

S/he can guide you through the particulars of every investment you own, what withdrawing from the individual assets would mean for you, and how it could potentially affect your tax liabilities.

In short, s/he will help you plan for your retirement, rather than simply amassing investment and retirement accounts. This planning, in turn, needs to focus on what you want out of your retirement – your goals, your needs, your desires.

Of course it’s important to put those investment and retirement accounts in place and contribute to them regularly. But retirement planning is much more than total dollar amounts – and your financial planner knows both that fact and how to leverage your assets to give you the best possible retirement plan to meet the long-term goals that are uniquely yours.

Because your plans are just that – they are yours. They aren’t anyone else’s plans. Your goals are your own, and each individual’s goals are based on their unique wants, needs, and circumstances.

If you are wondering how to best plan for your own retirement, and would like some counsel and perspective from a seasoned financial planner, please click here to email us directly – we are here to help.

Until next Wednesday –

Peace,

Eric

2022

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