Keeping An Eye On Pending Retirement Legislation That Could Impact Retirees
When it comes to financial planning, everything would be much easier if we could predict the future.
However, we know that markets and life come with many unknowns as we look ahead into the future.
There are several retirement legislation proposals being talked about that could have some big impact on retirees. While nothing is set in stone, it is important to understand the implications and potentially make some proactive financial planning actions.
Pending Retirement Legislation Being Talked About
Below is a high-level list of some of the pending retirement legislation that could impact retirees in a positive way (aimed at reducing tax liabilities):
Raise the age for taking Required Minimum Distributions (RMDs) from 72 to 75
Offer an additional layer of catch-up contributions for employees over 60 when it comes to 401(k)’s and other employer-plans.
Allow for more flexibility and an expansion in scope as it relates to Qualified Charitable Distributions (QCDs)
Increasing the cap on State and Local Tax Deduction (SALT) above the current $10,000 cap to allow for more itemized deductions
Provide increases in tax credits to small businesses that offer retirement plans to their employees
More flexibility in 401(k) Plans to allow for part-time employees to participate
Student debt relief as an employer benefit through workplace retirement plans
Automatic enrollment into employer-sponsored retirement plans
Increase tax break rewards for lower-income earners that save more
On the other side of things, here is a list of other pending retirement legislation ideas that may have a negative impact for retirees (aimed at raising revenues):
Reduce the amount of pre-tax contributions, specifically targeting (1) catch-up contributions and (2) matches for employer retirement plans
Limit Roth IRA benefits for high-income earners
Raising the top income tax bracket from 37% to 39.6%
Increasing the top long-term capital gains tax rate from 20% to up to 43.4% for high-income earners
Eliminating the “step-up” in basis at death for certain individuals which would tax “unrealized gains” at death. This may potentially include gains of a primary residence.
Finally, below are just a few of the proposed Federal Estate Tax changes to be on the lookout for:
Reducing the lifetime exemption to $7 million for married individuals from $22.4 million
Increasing the estate tax rates to a progressive system starting at 45% going up to 65%
Reducing the annual gift tax exemption amount frm $15,000 to unlimited individuals to $10,000 / year total.
A Deeper Look Into Some Of The Pending Retirement Legislation That Has Negative Impacts For Retirees
While the several pieces of legislation noted above that have negative impacts on retirees are not set in stone, it is important to understand them. Here’s a little more on just a few:
Reducing The Amount Of Pre-Tax Contributions
The legislation on this one is focused on raising revenues. The bi-partisan House bill in question is proposing that the extra $6,500 “catch-up contribution” for those over 50 years old (within employer-sponsored plans) go automatically into the Roth “bucket”. This would force an extra $6,500 to be post-tax money, lowering any up-front tax savings for retirees. An alternative to this that has similar repercussions is requiring employer matches to be put into the Roth “bucket” as opposed to going in pre-tax.
Limiting Roth IRA Benefits For High-Income Earners
This is going to be a tough piece of legislation to pass, as it has been at the forefront of some conversations since 2016. Part of the proposal is focused on prohibiting contributions to Roth IRAs with account balance above $5 million and the other side of it is to prevent Roth Conversions for high-income earners.
Increases In Top Tax Bracket & Capital Gains
Nobody likes paying more taxes, but it looks like the proposals on these two fronts are focused on very high-income earners. For the highest tax bracket to go up from 37% to 39.6%, we are not quite getting to the pre-TCJA tax brackets, but they are getting closer. While current long-term capital gains rates are set at 0%, 15%, and 20% (depending on income levels), seeing a jump to 43.4% for high-income earners is going to be a tough piece of legislation to pass. Nonetheless, any shift in long-term capital gains rates is going to really impact the incentives of investors.
Federal Estate Tax Changes
With the three Federal Estate Tax changes noted above, it is clear that the IRS is trying to increase revenues and make it harder for large amounts of wealth to be gifted or inherited. If these changes come to pass, it is critical for those with even “reasonable” wealth to make sure that they take their generational wealth transfer & estate planning strategy seriously early on.
How To Plan For The Unknown
While it is very important to plan ahead, we still need to stay nimble and try to be as best informed as possible. With tax and estate laws always shifting and as noted in this article, pending legislation in the works targeting retirement, the best that we can do is control what we can. In addition, by having a solid financial plan and revisiting it regularly, you will always be one-step ahead.
The good thing about what is being discussed within the legislation, is that the government is realizing that retirees and savers deserve more help. If the incentives are aligned, this could be a very positive thing for most. However, nobody likes taxes. Therefore, at the end of the day, whenever the new legislation comes into effect and is finalized, the key will be to see how it all impacts you, your tax situation, and your retirement.
The Value Of Working With A Financial Planner
Financial planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on.
At Abel Financial Management, we are local, family-oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.