At the beginning of this year, several key changes have taken effect that we believe you should be made aware of. With the passing of the Secure 2.0 Act of 2022, many well- known and critical rules will change, having a direct impact on your finances. This is not meant to be an exhaustive list, simply a summary of changes that we believe will be most “popular.” Overall, we consider this legislation to be favorable for savers and investors and see opportunities for both to grow their wealth substantially with some of these changes. We have selected some key aspects that we believe will be of interest to Shadowbrook Clients.
1. Required Minimum Distributions:
a. Age will increase from 72 to 73
In 2033 the threshold age increases to age 75
b. Penalties will be cut by half i. From 50% to 25%
Can be lowered to 10% if the account owner takes out the RMD amount and submits a corrected tax return in a timely fashion.
c. Thought: Delaying RMDs can be attractive given the increased period of wealth compounding but the amount of the RMD can also raise income and therefore the tax level of the individual during distribution years.
2. Catch-up Contributions:
a. Individuals aged 60-63 will be able to contribute “catch-up” contributions of up to $10,000 in their workplace plan and this amount will be indexed to inflation.
b. In 2024 IRAs will have their $1,000 catch-up contribution linked to inflation.
Note: there are caveats tied to income which should be addressed with your CPA / Tax Professional.
3. Qualified Charitable Distributions:
From 2023 onwards, individuals aged 701⁄2 and above can opt to include, in their QCD limit, a one-time donation of up to $50,000, which will be adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.
4. 529 Plans:
a. We find this to be a very exciting development, 529 over-funding has been a long- term concern and this change minimizes some of that risk. Effective in 2024, the new law permits individuals to move up to $35,000 of remaining funds from a 529 Plan directly into a Roth IRA for the same beneficiary without incurring income tax and a 10% penalty on the earnings portion. However, this is subject to limitations.
i. The 529 plan must have been active for a minimum of 15 years
ii. The rollover amount cannot exceed the cumulative limit of $35,000 within five
years before the distribution date.
iii. Contributions made to the 529 plan in the previous five years and their
associated earnings are not eligible for the rollover.
iv. The yearly amount transferred to a Roth IRA must be within the annual IRA
contribution limits and counts towards the annual limit. It is worth noting that
until 2023, the earnings portion of non-qualified 529 plan distributions remains
subject to income tax and a 10% penalty.
b. This creates excellent planning capabilities for generational wealth!
5. Roth Employer Plans:
Starting in 2023, employees can elect to have employer-matching contributions directed toward their Roth 401(k) plan (Note: this contribution will be considered taxable income in the year of the contribution). Previously, Roth 401(k)s were subject to RMDs, while Roth IRAs were not. However, beginning in 2024, a provision in the SECURE 2.0 Act eliminates the RMD requirements for workplace-based Roth plans, meaning Roth 401(k)s and Roth IRAs will enjoy similar RMD treatment. Furthermore, from 2023, employers can establish Roth accounts, open to after-tax contributions, for SIMPLE and SEP retirement plans. We find this to be a very exciting development!
Note: We believe that if the RMD age has increased there will be an increase in the Primary Insurance Age for Social Security Income in the future.
Critical Disclosure: Tim Marian, Wayne Stoneback, and Shadowbrook do not provide tax or legal advice. This is meant for informational purposes, and no warranties are made as to the accuracy or completeness of this information. Please consult your CPA, Tax and Legal Specialist, and the current legislation to ensure that any and all changes are appropriate for your personal goals and financial situation.
Disclosures
We, Tim Marian and Wayne Stoneback, declare that any and all views and opinions which are expressed in this report are our personal views, which are not influenced by any consideration received from any party or client relationship. Shadowbrook Private Wealth LLC (“Shadowbrook”) is a registered investment advisor. This commentary is provided for informational and educational purposes only and is not intended to be investment advice or a recommendation to purchase or sell any security. Shadowbrook provides investment advice to clients only after gaining a thorough understanding of the client’s financial situation, existing portfolio holdings and related information. This commentary includes information derived from third-party sources, which are believed to be reliable but are not audited by Shadowbrook. Information is at a point in time and subject to change without notice. Please contact Shadowbrook with any questions you may have on this content or your accounts. Our research is intended solely for clients and/or individuals and/or corporations that have directly expressed an interest in working with Shadowbrook Private Wealth LLC or in our opinions on financial markets and securities. Please note that all research, opinions, and analysis are based on what we believe to be current public information. Any information, data, numbers, projections, forecasts, or estimates are based on the date hereof and are subject to change without any prior notice or notification. We retain the right to update our research on an irregular basis and declare that most reports are disseminated at irregular intervals. Please note: We directly invest in many of the securities which we research and publish opinions on. While we do not trade our assets the same day as any client accounts to avoid any possibility of front running, manipulation, or other inappropriate behavior, we are also direct investors in many of the holdings we cover. This report is not an offer to buy or sell any security in any jurisdiction and does not constitute any kind of personal recommendation. Any analysis is meant to be educational and taken in the context of a larger investment theme that covers your personalized written financial plan. DO NOT MISCONSTRUE THIS FOR TRADING RECOMMENDATIONS. PLEASE SPEAK TO YOUR FINANCIAL ADVISOR BEFORE TRANSACTING IN ANY SECURITIES. THIS IS NOT A SOLICITATION TO BUY OR SELL ANY SECURITY! Please ensure that you speak to your tax professional to discuss any potential tax implications of transacting in various securities. The price and value of any investment vehicles mentioned in this report can and do fluctuate, please seek professional advice. Any past performance does not guarantee future results. Certain types of transactions involving derivative products also bear substantial risk and should only be used by experienced investors in the proper context. The appropriateness of any particular security or investment strategy will depend on the circumstances, education, experience, expertise, and financial plan of the individual. Investors should attentively read the prospectus and fund documents of any investment vehicle to understand the risk profile, objective, costs, and time horizon to gauge if they are appropriate for their individual circumstances. Diversification, Asset Allocation strategies, and Rebalancing strategies do not ensure profits or guarantee protection from loss of principal. Shadowbrook Private Wealth LLC and its representatives do not under any circumstances offer Tax, Legal, and/or Accounting advice or guidance of any kind.
INVESTMENTS:
- are not insured by the FDIC;
- are not deposits or other obligations of the institution and are not guaranteed by the institution; and,
- are subject to investment risks, including possible loss of the principal invested.
Shadowbrook Private Wealth
phone number: 646-884-4874
email: office@shadowbrookwealth.com
website: shadowbrookwealth.com
For US Investors only, Educational Material, Please read all disclosures, January/2023
Comments