Part 2 of “under the radar” tax law changes. These changes lead to a needed discussion of current, related tax topics applying to ALL ages of savers with 401k accounts – and possibly IRA accounts too. There is still a decent amount of time remaining in 2023 to make a difference in 401k saving.
Remember that Roth 401k plans have slightly different income requirements than Roth IRA accounts:
Roth 401k accounts (which run alongside regular 401k accounts) have NO income limits.
Roth IRA accounts DO have income limits.
Roth 401k monies have NO RMDs under current tax law. Traditional, pre-tax 401k monies have RMDs and create taxable income in the future.
Consider this edition of TGIF 2 Minutes an “automatic Part 1” in a 2-part series on changes to the taxation of 401k contributions.
Calling these tax changes “under the radar” may be underestimating the level of attention paid by the average TGIF 2 Minutes reader to tax news. But fear not! Missing these tax changes is common and mostly due to
the IRS typically making substantial tax law changes overnight in the last two weeks of December (see: 2015, 2017, 2020, 2021, 2022 and prior) thus easily missed by the most attentive of savers amidst year-end and holiday activity,
the complicated language used in the changes, confusing both savers and employers and their HR departments.
For a bond that must be held for a minimum of five (5) years for full interest to be received and can only be bought in amounts of $10,000 per year, I get a lot of questions.
To put the situation in perspective, for clients and friends with high levels of income, in the hundreds of thousands and much more, and high tax rates – marginal rates of over 32% – the interest at stake with an I-Bond is currently $600 to $800 per year and that is before taxes! That level of net interest may pay a portion of one car lease payment per year or weekend gas for a boat (in 5 years). BUT nevertheless, I get questions.
There is no sugar-coating it: investors in 2022 have experienced the biggest – and longest – down year for stock and bond markets since the 2007-2008 financial crisis. One of the only consolations is that over the past 13 years there have been tremendous gains overall, still with a few bumps along the way. Below I outline a few more consolations, or ways to make the best of down markets.
First a quick note: For newer, younger investors it may be difficult to not yet see long-term gains having accumulated in portfolios. Know that time horizon and future earnings potential are two huge positives working in your favor.
Here are a handful of ways to make the best of down markets – and to take advantage of higher interest rates (hint: there are more positives around higher interest rates than the media lets on).
For savers with healthy balances in pre-tax 401k and IRA accounts, use the opportunity to convert pre-tax IRA monies to Roth IRA monies.
From the Archives of TGIF 2 Minutes (original post May 13, 2022) to reflect my recent purchase of I-Bonds and continued questions received:
“What are I Bonds?” The “I” in I Bonds stands for Inflation, which is why these bonds are so HOT at the moment. (Note: inflation overall is clearly not a good thing; I Bond interest rates may be one of the only things that benefit from skyrocketing inflation.)
You can skip this entire post and simply go to www.TreasuryDirect.gov and click on “How to buy Series I” under the column, “Individuals”. The website is written – literally – as if a third grader could understand it. See the * and ** footnotes below.
The “I Bond phenomenon” has heated up in the past eighteen months with the spike in inflation. Their current, high interest rate warrants taking a look.
“What are I Bonds?” Thank you to a growing number of curious and smart clients, friends and colleagues for hammering this question enough over the past several months to warrant a TGIF 2 Minutes dedicated to I-Bonds. The “I” in I Bonds stands for inflation, which is why these bonds are so HOT at the moment. (Note: inflation overall is clearly not a good thing; I Bond interest rates may be one of the only things that benefit from skyrocketing inflation.)
Inflation is higher in 2022 than it has been in over 40 years – longer than lots of TGIF 2 Minutes readers may have been alive, and certainly longer than lots of readers have been working for, earning, and spending “real money”.
The “I” in I Bonds stands for inflation, which is why these bonds are so HOT at the moment.
Yup, it is tax season. This year as clients and friends were completing their 2021 tax returns* the cries of, “Are you kidding me?” and “This is by far the most taxes I have ever paid in my life!” were louder than ever. There were valid reasons for wealthier taxpayers paying more taxes for tax year 2021 – far more than for tax year 2020. A few reasons were somewhat UN-related to the coronavirus pandemic, and a number of reasons were directly pandemic-related.
The majority of my clients and friends simply made more money in 2021 than 2020. (Is that a bad thing? Most likely not.) The pandemic, in a delayed fashion, led to promotions and opportunities in 2021 for lots of individuals in corporate America and at companies that “dug in” amidst epic challenges in 2020. Retention and performance bonuses wound up being paid in 2021 (continuing in 2022), following a time in late 2020 when it seemed basic compensation and jobs were at serious risk. This turnaround was a huge irony and welcome relief to a number of people – and the “flip side” became higher taxes for tax year 2021.
Pandemic-related factors were to blame for higher 2021 taxes in several “hidden” ways.
Clearly another topic with multiple sequels, aging has its positives and not-so-positives. Recently a slight positive – from the IRS.
Its Life Expectancy Tables, otherwise known as the “IRS Uniform Life Tables I, II and III”, have adjusted the American life expectancy UP by approximately two more years. That means that RMD amounts, or required minimum distributions, from IRA, 401k and other retirement accounts will be slightly lower when calculated. These RMDs count as taxable income so even a small break will be welcome!
Increasing longevity is a compelling reason to develop or maintain a well-laid out long-term savings plan.
Wow… year-end 2021 is fast approaching. As if 2020 was the year we all wanted to turn the page… it is deja vu all over again in 2021. BUT a positive spin can still be put on year-to-date 2021, especially with respect to market returns.
It may be too early to say that stock market gains, to date, have been better than decent in 2021. From the US small-cap index up 12%, to large-cap S&P 500 up 22%, to Nasdaq up 19%, to the Dow Jones up 13%, these are all solid year-to-date returns.
Take the time before year-end to evaluate portfolio gains and asset allocation.
