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Summer Planning Update: A Mid-Year Check-In

As the temperature heats up and kids get out of school for the year, we are all tempted to soak up the sun and turn our focus to play. Markets are notoriously slow during the summer months as clients and employees alike head out on vacation, but the financial planning team at Bartlett is hard at work. With nearly 100 new provisions spanning all types of retirement plans, the Secure 2.0 Act of 2022 has given us new retirement planning opportunities to consider. And with the December 2025 expiration date for key parts of the Tax Cut and Jobs Act of 2017 looming, we are strategizing about how to take advantage of the current income tax and estate tax laws before they go away.

Read on for a look at some of the items Bartlett’s financial planning team is focused on right now.

New retirement planning opportunities

The Secure 2.0 Act was passed at the end of 2022 and was packed with nearly 100 provisions that impact the way individuals can save for retirement. While many of these changes are small, incorporating them into your financial planning can have a major impact. 

New Roth opportunities

One of the more surprising aspects of the Secure 2.0 Act is that rather than eliminating popular Roth options like the back door Roth conversion, it doubled down on Roth accounts. Roth savings options are now available to SEP and SIMPLE IRA holders for the first time. This could be attractive for small business owners who want to maximize future tax-free income. 

Additionally, starting in 2024, catch-up contributions for high wage earners (those making $145,000 or more per year) will be required to be Roth. While business owners may be able to continue to make pre-tax catch-up contributions if their income is not classified as “wages,” most high earning salaried employees will be required to put some money into Roth accounts. Although this will mean higher taxes during their working years, it can also help highly paid employees build some tax diversification into their portfolios, which will give them more options when they start taking distributions during retirement.

Required minimum distribution age moved later

Secure 2.0 also pushed back the required minimum distribution age again. The original SECURE Act of 2019 changed the age that individuals are required to take distributions from their IRAs from 70 ½ to 72. Secure 2.0 has changed those ages again. For people born between 1951 and 1959, they will not have to start RMDs until age 73, and people born after 1960 will not have to start taking RMDs until age 75.

If you are not taking withdrawals from your retirement accounts to fund your lifestyle expenses, this is great news; you can let your retirement account balances continue to grow tax free for longer. However, waiting longer to take distributions means that when you finally do take them, your account balance will be larger, which means your required distributions will be larger. With larger distributions come higher taxes. 

One planning opportunity to combat this is to use the gap years between retirement and RMD age to take strategic IRA distributions. If you don’t need the distributions to fund lifestyle expenses, you can convert them to a Roth IRA where your retirement balances will continue to grow tax free and will eventually pass to your heirs tax free. This strategy means you realize income in years where you do not have to take it, but it can reduce your lifetime tax bill. 

Planning for the Expiration of the TCJA

In addition to Secure 2.0, we are thinking more about the sunsetting of the Tax Cuts and Jobs Act of 2017. Many of the provisions in the TCJA were temporary and there are some major income and estate planning laws that are set to expire on December 31, 2025 unless Congress acts to extend them. Given the high level of distinction in Congress and the increasing need for higher revenues, it is possible that Congress lets these provisions expire. 

Estate tax exemption cut in half

The 2017 passage of the TCJA increased the lifetime estate and gift tax exemption from $5.6 million for individuals and $11.18 million for couples to $11.18 million for individuals and $22.36 million for couples, indexed for inflation. However, this higher estate and gift tax exemption amount is set to expire at the end of 2025, at which point the exemption will revert to 2017 levels.

If your estate is expected to be below approximately $7 million in 2026, this change will not impact you.  However, if your family has an estate that could potentially be impacted by the change in the estate and gift tax exemption, you should be talking to your advisor and your attorney about how you can address that prior to 2025. 

One way to take advantage of the higher exemption amount is to fully use one person’s exemption now by making an irrevocable gift to a trust. This does mean that you must be in a position where you can give away substantial portions of your estate.  However, your advisor can help you determine whether you are in the position to take advantage of these strategies and then can work with your attorney to identify the right type of trust for this strategy.

Income tax increase

The other major provision of the TCJA that is set to expire in at the end of 2025 is the current tax lower tax brackets. The TCJA reduced the maximum tax rate for individual income tax to 37% and increased the income level at which it became applicable. When the TCJA expires, tax rates across the board will increase and the income at which they kick in will be lower than it is now. This means that most taxpayers will see an increase in taxes starting in 2026.

While it is possible that Congress will act to extend the current tax rates, that will be largely dependent on the appetite for decreasing tax revenue.  Before these more favorable rates go away, individuals can take advantage by strategically realizing income in 2023,2024, and 2025. 

One potential way to do this is to convert money from traditional to Roth IRAs. This will increase the tax diversification of your portfolio during your lifetime, but the largest benefit may be for your eventual beneficiaries. The original SECURE Act changed how inherited IRAs are treated and now most beneficiaries will be required to distribute their inherited IRAs within ten years. If the IRAs have a sizeable balance, this can lead to a hefty tax bill. On the other hand, because Roth IRAs are distributed tax free, inheriting Roth dollars has become even more advantageous for beneficiaries. They still have to distribute them within ten years of the original owner’s date of death, but they do not have to pay taxes on the distributions, which leaves significantly more money for your heirs. 

Talk to Your Advisor

Tax laws are written in pencil, not pen, which means the only constant is change. With the changes created by the Secure 2.0 Act and the looming expiration of the Tax Cuts and Jobs Act, there may be substantial planning opportunities for you. Talk to your advisor about how these changing laws could impact your financial plan.

These legislative moves affect everyone differently. Your Bartlett team works hard to understand your unique financial situation so that we can tailor solutions to your individual goals. If you have yet to speak with your team about Bartlett’s financial planning services, please contact your advisor.

Meet your Bartlett Chicago financial planning team.

Laura A. Cuber, CFP® is a Wealth Advisor specializing in complex financial planning needs, particularly those affecting women in transition, multi-generational families, and young professionals. Laura is a graduate of Washington University in St. Louis and is a Certified Financial Planner (CFP®). Laura joined Bartlett in 2022 and has 14 years of industry experience. She is active in her community of Naperville.

Melissa Mabley Martin, CFP®, CDFA® is a Wealth Advisor focused on clients experiencing major life transitions or events, high new worth individuals and families, and next-generation wealth education and planning. Melissa is a graduate of Indiana University and received her MBA from the University of Michigan. She is a Certified Financial Planner (CFP®) and Chartered Divorce Financial Analyst (CDFA®). Melissa joined Bartlett in 2019 and has 21 years of industry experience.

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