Retirement Rules and Tax Changes You Need to Know
It’s been said that the only constant in life is change. Some changes are fixed, like the change of seasons, while other changes are evolutionary and progressive, tossing new circumstances our way as time goes on. It was ancient Greek philosopher Heraclitus observed that the natural world was in a constant state of movement. People age, develop habits and move environments.
And yet it seems that many people fear change. Generally, I believe that most people especially dislike change when it is thrust upon them without their input. Turns out, we like some control with our change so it makes sense that we resist it if we aren’t included in the decision-making process. For example, a former neighbor of mine, let’s call him Saul, recently moved with his wife and sons across the country due to a big promotion and he mentioned that his teenage sons were adamantly opposed to it. They didn’t want to hear about the great new high school, the gorgeous weather, and a nice new house with their own bathrooms. They argued about it up until moving day – but Saul says that once they settled in, the boys loved it. Sure, they missed their friends, but they were now in a bigger city with lots of new things to see and do, and their fear was soon replaced with excitement. I think that the idea of the move, of all these life changes, was scarier than the move itself and especially because it was announced to them and the decision made without their input. Now thankfully, it seems to be working out for them!
And as a finance guy, I see parallels to our natural fear of change in retirement planning, too. Saving and investing for retirement and then making that money last for 2 or 3 decades is fraught with uncertainty. Markets go up and down – sometimes significantly. Inflation and the possibility of large healthcare expenses, coupled with a volatile market and changing tax laws can create high stress levels. And because these are all things that we can’t control, we need to find ways to become more comfortable with them. I believe that in life and especially in finances, learning how to adapt to change is key to our success.
And so with our time today, I’d like to tackle a few recent tax law changes that will affect most retirees and pre-retirees, along with some strategies to help you adapt to them.
One significant item is the end of the Tax & Job Cuts Act (TJCA), which expires at the end of 2025. Among the changes we will see are tax rates increasing to their 2017 levels. The standard deduction will be cut roughly in half, and the personal exemption will return while the child tax credit (CTC) will be cut. The current estate tax exemption will be reduced significantly. Bottom line, taxes will increase for most US households. But with this change comes the opportunity to have some control over the taxes you pay. For example, now may be an ideal time to convert some of your pre-tax assets (think IRAs and other qualified retirement accounts) into a Roth IRA. You’ll owe taxes on the converted funds now, but you’ll pay them at today’s rates instead of likely higher tax rates in the future. Those funds will then be tax free income to you in retirement, which in turn can help you avoid Medicare surcharges or taxation of your Social Security income.
And while we’re talking about Roth accounts, the IRS recently declared that there are no Required Minimum Distributions (RMDS) for Roth 401(k)s. Now this change is actually a benefit no matter how you look at it. You see, prior to the passage of Secure Act 2.0, only Roth IRAs allowed the original account owner to skip lifetime RMDs. Those who saved in a Roth 401(k), and never rolled the funds over to a Roth IRA were still subject to mandatory withdrawals. Starting in 2024, individuals with assets in a Roth 401(k) are not subject to mandatory distributions during their lifetime, allowing the funds to continue to grow and be passed down to beneficiaries’ tax free.
Another benefit of the Secure Act 2.0 is that starting in 2026, employees aged 50 or older can only make catch-up contributions to an after-tax Roth account. The new rule will only impact individuals deemed 'high earning', defined as those making more than $145,000 (indexed) in the prior year for the same employer. This may be a planning opportunity for individuals older than 50 who change jobs mid-year as they could be eligible for pre-tax catch-up contributions for another year or two before triggering the compensation limit for the prior year. The changes will apply to 401(k), 401(a), 403(b), and 457(b) plans starting in 2026. And since executives older than 50 are usually in their highest earning years, the inability to exclude $7,500 plus from their taxable income is a good thing for sure.
Although not new for 2024, since 2023, Roth options have expanded in the retirement landscape. Employers can choose to offer non-elective or employer matching contributions to Roth accounts. Employers offering matching based on student loan payment may also apply contributions to Roth accounts. All employer funds treated as Roth will be immediately 100% vested.
In addition, SIMPLE and SEP IRAs are no longer limited to pre-tax options. The Secure Act 2.0 also made it possible for employers to offer after-tax Roth SEP or SIMPLE IRA funding if the employee elects. SIMPLE IRAs can be funded by both the employer and employee, while SEP IRAs are only funded by the employer.
Confused by all the changes? You're not alone. It's this ever-evolving regulatory landscape, it's more difficult than ever to keep up with shifting tax law and retirement rules. But with these changes, we often find opportunities too. And with a complete retirement system, one that includes a downside risk mitigation program that anticipates change and uncertainty, you can be assured that your retirement won’t be derailed by the unknown.
So as always - be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.
We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.
