What The Secure Act 2.0 Means For You

Secure Act 2.0

At the end of 2022, the Consolidated Appropriations Act was passed, which included a retirement bill known as SECURE Act 2.0. This law was built upon the original SECURE Act legislation passed in 2019. 

The SECURE Act 2.0 expands and changes the rules on saving for retirement, withdrawals from retirement plans, increases the savings thresholds and tax benefits for Roth IRAs, 401(k) plans and more. 

Ultimately, most people just want to know what parts of the Secure 2.0 Act apply to them. Here’s a summary of key provisions to pay attention to. 

 

High Wage Earners & Catch-Up Contributions 

Catch-up contributions allow folks 50 and older to save even more in workplace retirement plans.. For 2023, the catch-up contribution was raised to $7,500. This is in addition to the regular annual contribution limit of $22,500, meaning those  50 and above eligible to save $30,000 in total for 2023. 

Effective in 2024, people with wages (like w2 income) above $145k (which will be indexed for inflation) are only eligible for Roth catch-up contributions. Regular contributions may still be made with pretax dollars. The new rules apply to 401(k), 403(b) and 457(b) plans, not to catch-up contributions for IRAs. The IRA catch-up contribution limit will finally adjust automatically for inflation from its stagnant $1k cap in 2024 as well. 

Planning opportunities: You may be able to avoid mandatory Roth 401(k) catch-up contributions with income above $145k if you are self employed. Also, if you change jobs in the middle of the year, you may still be able to do pretax catch-up contributions even if you’re a high wage earner. 

 

Roth-Related Changes

If you’re an employee with an employer-sponsored retirement plan, you’ve only been able to receive matching contributions on a pre-tax basis. Employers may now offer the option to match and make non-elective contributions via Roth 401(k) accounts. Heads up: You’ll also pay taxes on these employer contributions. 

Beginning in 2024, employer retirement plan based Roth accounts like Roth 401(k) and Roth 403(b) will no longer require RMDs, similar to individual Roth IRAs. SEP and SIMPLE IRAs will now allow Roth contributions. 

Good news: One component that was not restricted or eliminated was existing Roth strategies, like backdoor conversions or mega-back-door Roth contributions. 

 

Additional Flexibility for 529 College Savings Accounts 

Beginning in 2024, it’s possible to move money from a 529 plan directly into a Roth IRA, and the transfers are not subject to income limitations. This comes as great news for savers who had concerns about potentially overfunding their child’s 529 plan. There are, however, certain conditions that must be met:

  • The Roth IRA receiving the money must be in the same name of the beneficiary of the 529 plan; 
  • The 529 plan must have been maintained for at least 15 years;
  • The annual limit is the IRA contribution limit for the year, reduced by any regular IRA or Roth IRA contributions made that year;
  • Lifetime transfer limit of $35k

Planning opportunity: If a parent contributed to a 529 account for their child, maintained ownership, and the child no longer needed the 529 money, it appears the parent may be able to change the beneficiary to themselves and then transfer the money to their own Roth IRA, subject to the conditions above. Note: Before doing so, please seek expert guidance. Some legislation interpretation still needs to be confirmed or rejected.  

 

Changes to Qualified Charitable Distributions (QCDs)

QCDs have been one of the best ways for people who are charitably inclined to give money directly from an IRA in a tax-efficient manner. The annual limit of $100k will now be indexed for inflation starting in 2024. 

It’s also now possible to use a QCD to fund certain types of charitable trusts. However, the maximum amount that can be moved is $50k. Given the time, expense and complexity that comes along with these types of trusts, this modest dollar limit may preclude most people from doing so. 

 

Changes to Required Minimum Distributions (RMDs)

RMDs are when you must take withdrawals from your retirement accounts, regardless if you want or need the money. The original SECURE Act raised the age for RMDs from 70.5 to 72. SECURE 2.0 pushes this out further:

  • Age 73 for folks born between 1951–1959 
  • Age 75 for folks born in 1960 or later
  • Turned 72 in 2022 or earlier? You must still keep taking RMDs.

The bill also decreases the penalty for missed RMDs from 50% to 25% of the shortfall, and providing the mistake is corrected in a timely manner, the penalty is now only 10%. 

Have a younger spouse? If they predecease you, you can now elect to be treated “as your deceased spouse,” which allows you to take RMDs based on their age rather than your own.

Planning opportunities: Pushing out the extra income created by RMDs age could mean additional years before the dreaded spike inMedicare Part B/D premiums and perhaps a few more years of Roth conversions. Please work closely with your advisor to see if this applies to you. 

 

Other Changes Worth Noting 

At over 400 pages, the legislation is long and cumbersome. While it’s impossible to include every component, we’ve focused on the items that are most likely to impact our clients. A few other items worth noting:

  • In 2028, some S Corp owners who sell shares to an Employee Stock Ownership Program (ESOP) may be eligible to defer up to 10% of their gain by taking advantage of a like-kind exchange; 
  • SECURE 2.0 expanded the list of 10% penalty exceptions for accessing retirement funds during times of need;
  • Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf. 

 

We’re Here to Help 

As we digest these latest changes and wait for important clarification on items that still remain ambiguous, we are already thinking proactively about which of our clients might be able to benefit. 

If you are wondering how these changes pertain to your situation and would like some professional guidance, please reach out, we’re here to help. 

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

How To Create a Charitable Giving Strategy

Charitable Giving

These days, requests for charitable donations are a year-round occurrence. Whether it’s giving money after a natural disaster, a request from your alma mater, or simply being asked whether you want to “round up” at the checkout line, there are endless opportunities to give. 

The end of the year is an especially good time to think about your charitable giving strategy to ensure your donations make the biggest impact, both to the organization and to yourself. 

Whether you’re a regular giver or just beginning to think about integrating charitable giving into your finances, having an informed plan will ensure, as Benjamin Franklin said, that you can “do well by doing good.”

An effective charitable giving strategy has three main components, which we’ll cover today. 

 

#1 – Types of Assets to Donate

Cash

For small charitable gifts, writing a check or donating via credit card is certainly a popular and easy option. Documentation for cash gifts, no matter how small, is key. Make sure you keep donation receipts, canceled checks, or credit card statements as proof of your gift.

It’s also important to remember that you may not receive a dollar-for-dollar tax deduction for your cash gifts in a given year. Deductions for cash donations are limited to 60% of your adjusted gross income (AGI) in a single tax year, with any contributions above these limits carried forward for up to five years.  

In 2020 and 2021, the CARES Act encouraged donations to charitable organizations by giving all taxpayers a $300 (single filer) or $600 (married filing jointly) deduction for cash gifts. It’s important to be aware that this deduction was not extended to 2022.

 

Appreciated Investments

Despite the stock market’s volatility in 2022, many people still have appreciated holdings, such as stocks, mutual funds or exchange traded funds, in their portfolio. Shares that have been held more than one year can be donated directly to a charity. 

The benefit of this type of donation is twofold: 

  • Rather than having to sell appreciated investments to generate cash to donate, which would result in paying tax on capital gains, the shares can be directly transferred to a charity. 
  • The organization receives the market value of the shares as a donation and can subsequently sell the investments tax-free because of its non-profit status. 

Donations of investments are generally deductible up to fair market value, but it’s important to remember that current deductions are capped at 30% of AGI, with a 5-year carryforward. 

 

Tangible Personal Property

Many organizations gladly accept used items such as clothing, furniture, or even vehicles, as long as they are considered to be in “good” condition under IRS rules. Most used household items, such as those donated to Goodwill or Salvation Army, should be valued at “thrift store prices” when determining an appropriate deduction amount. 

Items donated over the course of a year worth more than $250 but less than $500 should be documented and include the name and address of the organization, a description of the items donated, the original cost, and current fair market value of the items donated. 

Donations exceeding $500 fair market value up to $5,000 need to be documented on IRS Form 8283, which asks for more detailed information on the item’s condition, acquisition cost, and methodology for calculating the fair market value. Donations exceeding $5,000 in value require all the items listed above, in addition to an appraisal by a qualified appraiser. 

 

#2 – Tax Benefits of Giving

For some, the tax benefit received from making charitable contributions is secondary to supporting organizations doing meaningful work. For others, reducing tax liability in a given year is the primary motivating factor. 

Regardless of where you fall, being aware of current laws and adjusting your charitable giving strategy appropriately can lead to some meaningful tax savings. 

 

Standard Deduction Versus Itemizing 

One of the biggest tax considerations when it comes to charitable giving is whether you take the standard deduction or itemize. The Tax Cuts & Jobs Act of 2017 nearly doubled the standard deduction and reduced or eliminated a lot of tax deduction items. 

The standard deduction for single or head of household taxpayers in 2022 is $12,950. A married couple needs over $25,900 in deductions in order to itemize in 2022.

How does this relate to your charitable giving? Think of the standard deduction as the “hurdle” your deductions must overcome to realize any additional tax savings specifically from charitable giving. If your charitable giving plus other deductions don’t exceed the standard deduction, you are receiving the same tax benefit as if you had not donated anything to charity for the year.

 

Donor Advised Funds

Because of the high standard deduction, the popularity of Donor Advised Funds has skyrocketed in recent years. A Donor Advised Fund (DAF) is an account established specifically for charitable giving and can be opened with big brokerage firms like Schwab and Fidelity at very low annual costs. 

Contributions to DAFs can be made with cash.  A more beneficial strategy from a tax perspective, however, is funding a DAF with appreciated securities like stocks or mutual funds, real estate, crypto currencies, or even privately held businesses. 

The tax deduction for the contribution to the DAF is received in the year the contribution is made, and gifts to charitable organizations can then be spread out over subsequent years. 

For those looking to turbocharge their tax deductions, consider  a “bunching” strategy.   Several years of charitable contributions are made in a single tax year–enough to exceed the standard deduction–and charitable gifts are spread out over several years. 

 

Qualified Charitable Distributions

Qualified Charitable Distributions, or QCDs, are a great option for individuals with Individual Retirement Accounts (IRAs) who are 70.5 or older to give to charity and save on taxes.

Donations can be made directly from IRA accounts and the amount withdrawn is not subject to tax, as with regular IRA withdrawals. For those who have reached age 72 and are subject to annual required minimum distributions, a QCD will count towards the RMD, again reducing the tax that would be paid otherwise.

The maximum amount that can be given to charity in a year via a QCD is $100,000 and it’s important to still keep detailed records for tax purposes. 

 

#3 -Values Behind Your Giving

Beyond the technical aspects of giving, one of the most important considerations to any charitable giving plan is a thorough understanding of your personal values and goals. 

Start by taking a step back and contemplating what motivates you to give – is it the “warm-glow” you feel when making a donation, concerns for the benefit of others or causes, or some combination of the two?

Thinking through these factors can help you make rational giving decisions, make impactful gifts, and have a thought-out response when solicited for support. 

 

We’re Here to Help

If you are ready to start thinking about a charitable giving plan, or need guidance on adjusting your current plan, please reach out. We’re here to help. 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Five Ways to Uplevel Your End-of-Year Finances

End of Year To-Do's

Visit any Costco or Target (two of our favorites!) and you’ll see that fall is officially over and the holiday season is upon us. Not to despair, however. With a solid nine weeks left in 2021, now’s a great time to run through some important “to-do’s” and finish the year with your finances in good order.

To keep things easy, we broke it into our top five categories:

 

Be Mindful of Deadlines Ahead

With only a few pay periods remaining in 2021, make sure you’re on track to maximize your retirement plan contributions, especially if your employer offers a match. You can contribute up to $19,500 this calendar year to a 401(k) or 403(b), plus an additional $6,500 if you’re over age 50. 

If you want to increase contributions before the December 31st deadline, reach out to your HR department or payroll provider ASAP. It’s also a great opportunity to get next year’s contributions set up, as the maximum contribution amount jumps to $20,500 in 2022, for a total of $27,000 if you’re over 50. 

 

Use It or Lose It

A Flexible Spending Account (FSA) or Dependent Care FSA allows you to save pre-tax dollars throughout the year and use those funds to reimburse yourself for out-of-pocket expenses like copays, prescriptions, or child care expenses. While these accounts are a great way to save on taxes, typical FSA accounts have a “use it or lose it” provision whereby the balance in the account needs to be depleted by the end of the year. 

Employers do have the discretion to offer wiggle room and allow for some money to be carried over, usually $550. Due to the pandemic, the government is giving employers even more leeway, allowing for deadline extensions and larger balance carryforwards, including up to the total balance in an FSA. 

Be sure to find out what deadlines and limits apply to your plan, as you may want to contribute less money next year if you can carry-over an existing balance. If not, now’s the time to use up remaining funds and schedule doctor visits or stock up on FSA-eligible items, a handy list of which can be found here. 

 

Tax Planning Isn’t Just for April

While impending tax changes have been rumored since President Biden took office (check out our past blog posts on proposed tax changes) nothing has officially passed as of this post. Despite the uncertainty, it’s still a good idea to take a look at your income and deductions in 2021 and how they might compare to 2022 and beyond. 

If you were part of 2021’s Great Resignation and left your job, a Roth conversion in a lower-income year could be of great benefit. Conversely, if you were fortunate enough to receive a significant windfall, such as Restricted Stock Units (RSUs) vesting, other stock options, or a large bonus, make sure you are paying enough in estimated tax payments to avoid penalties come tax time. 

 

Double Check Your Portfolio

Though stocks have been on a winning streak for the last year or more, it’s worth taking a peek at your portfolio to see if any holdings are currently at a loss. Those investments can be sold and their losses used to offset capital gains realized this tax year or carried forward to a future tax year until depleted. 

If you don’t already have capital gains, you can offset up to $3,000 in ordinary income with realized capital losses. A word of caution however – be sure to familiarize yourself with wash sale rules before repurchasing a security sold at a loss, or you may find yourself in a bit of hot water with the IRS.

 

Make a Difference

Helping friends and family or supporting beloved charitable organizations can happen any time during the year, but there are some timing considerations if you’re looking to maximize your giving. 

This year, you can give up to $15,000 to another individual without making a dent in your lifetime estate and gift exclusion. If you are married and file jointly, that amount doubles to $30,000. Limits for 2022 have yet to be announced, but there is speculation that this amount will increase to $16,000 for single tax filers and $32,000 for married couples. 

Giving to charities has its own set of financial benefits and strategies vary depending on your circumstances. If you find a bit of excess cash in your bank account, here are a few options to consider:

  • Cash donations – Congress extended a provision of the CARES Act that gives single taxpayers a deduction of up to $300 for cash donations to some charities and $600 for married filing jointly. This applies even if you claim the standard deduction.
  • Strategic Donations – In addition to outright cash contributions, there are other options available such as donating appreciated stock, funding a donor advised fund, or a qualified charitable distribution (for those ages 70.5 or older). We can help determine which option is best for you. 

 

Reach Out

In the coming weeks, as you trade Pumpkin Spice Lattes for Peppermint Mochas, don’t forget to take a few moments to check-in on your financial position to make sure you’re taking full advantage of all the options available to you. We’re here to help.