New Retirement Changes That May Secure Your Future
One of the best attributes about my profession is the constant change in the rules for which we give advice to our clients. One of the worst attributes of our profession is the constant change in the rules for which we give advice to our clients. This double-edge sword keeps our team of professionals motivated to learn new strategies each day. Another aspect of constant change is the challenge of providing long-term advice to clients.
On December 29, 2022, while many of us were preparing for a New Year’s Eve Party, Congress and the President were finalizing the printing and signing of the Consolidated Appropriations Act of 2023 which contains a substantial number of changes pertaining to retirement plans. To summarize the plethora of changes, the idea was to create greater opportunities for plan participants to save for their future. Congress attempted to simplify many of the complex rules pertaining to employer retirement plans and encouraged employees to become savers through automatic enrollment provisions within retirement plans.
To encourage smaller employers, defined as those entities with 50 employees or less, to establish retirement plans, the IRS will allow a tax credit for 100% of the start-up costs for a plan. This is an increase from the previously allowed 50% credit. To take advantage of this credit the plan must be started after January 1, 2023. Many smaller companies may find that a retirement plan serves as a wonderful retention tool to maintain their workforce.
For individuals reaching a certain age in which distributions from their Individual Retirement Account (IRA) are required, good news is included in the new law. Prior to 2023, required minimum distributions (RMD) were mandated by the IRS at age 72. If the individual failed to meet the minimum distribution amount in distributions, a penalty of 50% of the value required to be reported in income as was assessed on the appropriate income tax return. Starting in 2023, the age for required distributions from an IRA is 73. The law also provided for greater longevity of life in the United States in that RMDs will not start until age 75 beginning on January 1, 2033.
Some employers have desired to provide incentives to certain classes of employers to participate in retirement plans. The new law provides for employers to offer de minimis financial incentives, not paid with plan assets, such as low-dollar gift cards, to boost participation in workplace retirement plans.
One of the reasons for employees to deny participation in workplace retirement plans is that the money is required to be invested for a considerable period of time and access to the funds for an emergency is penalized unless certain criteria are met. Under the new law, employers may rely on the employee certifying that deemed hardship provisions are met. This will allow a short-term distribution of assets or a permanent distribution based on the needs of the participant.
Smaller employers generally establish SIMPLE (Savings Incentive Match Plan for Employees) IRA Plans or SEP (Simplified Employee Pension) Plans due to the lowered threshold of reporting and minimal administrative costs associated with such plans. Certain criteria must be met by the employer in the number and types of employees but overall these plans are effective in saving for the future while capturing current tax deductions for the employer. In 2023, SIMPLE IRA’s are allowed to accept Roth contributions (which are post-tax). Also, SEP contributions by the employer (employees do not contribute to these types of retirement plans if not an owner) may be treated as Roth contributions. This, my friends, is a big deal for younger workers who may wish to take advantage of a lower income tax burden early in their career.
One of the more tenuous debates in Washington, DC has been the student loan forgiveness ordered by President Biden. Many students have worked multiple jobs to pay their way through college while others applied for loans. Some of the animus results from the students who chose to attend college while working and now seem to be offended by the exclusion of their efforts from the forgiveness order. Further, some allege individuals who attended very expensive private universities would be favored since they chose to attend a university requiring significantly higher tuition than the student who attended a state-sponsored university.
The reason for opening the debate door on student loans is that employers are allowed to make matching contributions to allowed retirement plans with respect to “qualified student loan payments” beginning in 2024. This will allow the employee to continue to reduce student loan debt while not forgoing savings for their future.
Emergencies do occur in life and many are caught without liquid funds to address the problem. In 2024, plan participants will be allowed a $1,000 early withdrawal without penalty to address emergency expenses. The participant has the option of repaying the withdrawal to the plan within three years.
Retirement does not have to be a complicated process. By planning accordingly with a Certified Financial Planner™ professional, you will feel more confident and comfortable about the future you choose. As I often inform clients, “You retire for the first time only once. It is better for your future that you do it right.” Go make your world a little brighter, smile at everyone you meet!
Registered Principal, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Jimmy J. Williams is an Investment Advisor Representative of Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 S. 3rd, Ste. 4, McAlester, OK 74501.