Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®, RICP®

When starting a career, we are always told to contribute at least the minimum needed to get the full company match in our 401k (typically between 4% and 8%, depending on how your plan is structured). “Never throw away free money!” is a phrase we use quite often with children of clients who are starting that first job out of college.

But what about those who are well established in their career and fully maximizing 401k contributions ($22,500 for 2023, $29,000 if you are over the age of 50)? They should not have to worry about not receiving their full employer match, right? Well, depending on how your 401k plan is structured at work, the answer is yes! 

Let me provide an example to explain what I am referring to:
Let’s say Heather (age 54) earns a salary of $325,000 and elects to contribute 18% of her salary to her 401k. Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will max out her contributions ($29,000) by the end of June each year. Let us also assume that Heather receives a 5% employer match on her 401k – this translates into $16,250/yr ($325,000 x 5%). If Heather does not have what is known as a “true up” feature within her plan, her employer will stop making matching contributions on her behalf halfway through the year – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather over $8,000 in matching dollars for the year!

So, how can you ensure you receive the matching dollars you are fully entitled to within your 401k? 
The first step I recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature. If it does, you are in the clear – regardless of when you max out for the year with your contributions, you will be receiving the full company match you are entitled to. 

If your plan does not offer the “true up” feature and you plan on maximizing your 401k contributions for the year, I would strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you are over 50, plan on contributing $29,000 to your 401k this year, and if you are paid bi-weekly, elect to defer $1,115.38 every pay period ($1,115.38 x 26 pay periods = $29,000). Doing so will ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out by the end of June and potentially loses out on significant matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning, and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance. 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

How Doing Your Retirement Planning Can Put You in the Driver’s Seat

Contributed by: Sandra Adams, CFP®

I have had some fascinating conversations in meetings with prospective clients over the last several months. Most of these clients have never previously worked with a financial planner, choosing the DIY (“Do It Yourself”) route until now. And for most, now that they are within a few years of retirement, knowing if they truly have the assets and income resources to be able to retire and support themselves throughout their life expectancies is something they do not want to leave to chance.

Going through the in-depth retirement planning process with the assistance of a financial planning professional can help answer the many questions that so many clients have trouble answering on their own or can only guess without accurate analysis. Things like:

• When should I take Social Security (or when should each of us take Social Security if we are a married couple)?;

• When is the best time to draw pensions and/or should I take the lifetime income benefit (if I choose this option, do I take a straight life payout vs. a payout with a spousal benefit if I am married) vs. the lump sum payout from my pension benefit?;

• If I have an annuity(ies), should I use them for income during retirement, and when?;

• What accounts do I draw from, and when do I draw from them to pay the least amount of taxes during retirement?

• How will I pay for Long Term Care if I do not have Long Term Care insurance?

• And most importantly, will I be able to financially support the lifestyle I desire for as long as I may live without running out of money?

Many potential clients I have met recently have come in assuming they will need to work until they are at least 70 (the age of their maximum Social Security age). While they may value their work, in many cases, it has seemed apparent that there was a fair amount of stress involved with the work they are doing. Knowing whether the client could retire earlier than 70 and giving them the CHOICE about when they could retire would undoubtedly put them in the driver’s seat. Knowledge is power!

Doing your retirement planning earlier than later allows you to make the choices you want to make when you want to make them. Knowing where you stand financially, now and into the future, allows you to decide what you want to do and when you want to do it — you are the driver, and you choose the route to your retirement destination!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Opinions expressed in the attached article are those of Sandra D. Adams, CFP® and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

SECURE ACT 2.0 Is FINALLY Happening!

Contributed by: Kali Hassinger, CFP®, CSRIC™

For the last several months, we have been monitoring the possibility of a "Secure Act 2.0" being passed into legislation. The initial SECURE Act (which stands for Setting Every Community Up for Retirement) was passed in late 2019, and had far-reaching effects on Required Minimum Distributions, inherited retirement accounts, and expanded the ability to contribute to IRAs.

Throughout the year, there have been talks about additional legislation through the Secure Act 2.0 to further expand access to retirement savings for individuals, small-business employees, employees with student loans, and part-time workers. 

On Thursday, December 22nd, Secure Act 2.0 was pushed through as part of the $1.7 billion 2023 omnibus appropriations bill (which is a brief 4,000+ page read). Some of the key provisions contained in the bill include:

• Higher retirement plan catch-up limits beginning at age 60 and increasing each year of age. This will likely go into effect in 2024.

• Increasing the Required Minimum Distribution age to 73 in 2023, and eventually it will be increased to age 75 over several years.

• Requiring employers to auto-enroll new employees into their current 401(k) or 403(b) plans with an automatic contribution increase each year.

• The tax penalty for missing a Required Minimum Distribution will be reduced from 50% to 25%, with the future ability to reduce the penalty to 10% if the miss is corrected in a timely manner.

• The establishment of a “starter” 401(k) plan or 403(b) plan for employers that do not currently offer retirement plans.

• A 100% tax credit for employer matches in newly established employer retirement plans.

• Allowing student loan repayments to be treated as retirement plan contributions for company match purposes.

• Establishment of a retirement savings Lost and Found for those who have lost track of old retirement plans.

• A pension linked emergency savings provision.  These accounts must be held in cash and contributions (up to a maximum balance of $2,500) must be treated as retirement plan contributions for matching purposes. Distributions would be tax free.

• Emergency withdrawals up to $1,000 every 3 years, or until the previous withdrawal has been paid back, will be allowed from retirement plans.

• Part-time employees with 2 years of 500+ hours will qualify for retirement plan participation

• The ability to transfer some 529 funds to a Roth IRA in the 529 beneficiary’s name. The amount that can be transferred is subject to Roth IRA annual contribution limits with the lifetime transfer amount of $35,000. Roth IRA contribution income limits do not apply.  The 529 needs to have been established for 15 years.

Many of these updates will slowly go into effect over time, and we are continuing to actively monitor and research Secure Act 2.0 as details continue to emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Blogs You May Have Missed (And Are Worth the Read!)

Contributed by: Center for Financial Planning, Inc.®

As we mentioned last week, Center team members have written an astounding 59 blogs in 2022! With that much content, it’s easy to miss some of our posts here and there. So, take a look at the list below for some of our Most Underrated Blogs of the Year. There just may be one that peaks your interest!

1. Harvesting Losses in Volatile Markets

Kali Hassinger, CFP®, CSRIC™ discusses several ways you can carry out a successful loss harvesting strategy during inevitable periods of market volatility.

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2. What Happens to my Social Security Benefit If I Retire Early?

Are you considering an early retirement? Kali Hassinger, CFP®, CSRIC™ explains how Social Security is one topic you'll want to check on before making any final decisions.

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3. How to Find the Right Retirement Income Figure for You

When it comes to your retirement income, you don't want to guess. Sandy Adams, CFP® shows you where you should start to develop the most accurate number for you.

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4. Why Retirement Planning is Like Climbing Mount Everest

Nick Defenthaler, CFP®, RICP® shares that our goal as your advisor is to help guide you on your journey - both up and down the mountain of retirement!

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5. New Guidelines May Help Retirees Retain More Savings

Josh Bitel, CFP® shares new RMD tables that now reflect longer life expectancies, which means a reduction in yearly required distributions.

The Results Are In…The Top Five Blogs of 2022

Contributed by: Center for Financial Planning, Inc.®

Over the course of 2022, Center team members have written an astounding 59 blogs on topics including retirement planning, market volatility, eldercare, and investment planning - just to name a few. The results are in, and here are our Five Most Popular Blogs to close out the year. Check out our list below to see how many you have read!

1. Is My Pension Subject to Michigan Income Tax?

In 2012, Michigan joined the majority of states in taxing pension and retirement account income. Nick Defenthaler, CFP®, RICP® reviews how these taxes can play a role in one's overall retirement income planning strategy.

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2. The “10-Year Rule” Update You Need to Know About

One of the details of the SECURE Act that many of us call the "10-year rule" may be changing slightly. Jeanette LoPiccolo, CFP® shares what you need to know.

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3. Strategies for Retirees: Understanding Your Tax Bracket

Michael Brocavich, CFP® describes the two simple strategies that could potentially help reduce the amount of tax due in retirement.

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4. The Basics of Series I Savings Bonds

With the inflation increase, Series I savings bonds have become an attractive investment. Kelsey Arvai, MBA shares what to consider before adding them to your portfolio.

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5. What is Retirees’ Biggest Fear?

It's not the fear of running out of money. Not the stock market either. Nor loneliness. Sandy Adams, CFP® tells you what it truly is.

New Retirement Plan Contribution and Eligibility Limits for 2023

Contributed by: Robert Ingram, CFP®

If you are planning your retirement savings goals for the New Year, you may be surprised by how much you can contribute to your retirement accounts in 2023. The IRS has increased the annual contribution limits for employer retirement plans and IRA accounts, as well as the eligibility limits for some contributions. With inflation in 2022 at a 40-year high, many of these increases are also some of the largest in decades. Here are some adjustments worth noting for 2023.

Employe retirement plan contribution limits (401k, 403b, most 457 plans, and Thrift Saving):

• $22,500 annual employee elective deferral contribution limit (increased from $20,500 in 2022)

• $7,500 extra "catch-up" contribution if over the age of 50 (increased from $6,500 in 2022)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (e.g., employee deferrals, employer matching, and profit sharing), is $66,000 or $73,500 if over the age of 50 (increased from $61,000 or $67,500 for age 50+ in 2022)

Traditional, Roth, SIMPLE IRA contribution limits:

Traditional and Roth IRA

• $6,500 annual contribution limit (increased from $6,000 in 2022)

• $1,000 "catch-up" contribution if over the age of 50 remains the same

Note: The annual limit applies to any combination of Traditional IRA and Roth IRA contributions. (i.e., You would not be able to contribute up the maximum to a Traditional IRA and up the maximum to a Roth IRA.)

SIMPLE IRA

• $15,500 annual contribution limit (increased from $14,000 in 2022)

• $3,500 "catch-up" contribution if over the age of 50 (increased from $3,000 in 2022)

Traditional IRA deductibility (income limits):

Contributions to a Traditional IRA may be tax deductible depending on your tax filing status, whether a retirement plan covers you (or your spouse) through an employer, and your Modified Adjusted Gross Income (MAGI). The amount of a Traditional IRA contribution that is deductible is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For example,

Single

• Covered under a plan

  • Partial deduction phase-out begins at $73,000 up to $83,000 (then above this no deduction) compared to 2022 (phase-out: $68,000 to $78,000)

Married filing jointly

• Spouse contributing to the IRA is covered under a plan

  • Phase-out begins at $116,000 to $136,000 compared to 2022 (phase-out: $109,000 to $129,000)

• Spouse contributing is not covered by a plan, but other spouse is covered under plan

  • Phase-out begins at $218,000 to $228,000 compared to 2022 (phase-out: $204,000 to $214,000)

Roth IRA contribution (income limits):

Just like making deductible contributions to a Traditional IRA, being eligible to contribute to a Roth IRA depends on your tax filing status and income. Your allowable contribution is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For 2023 the limits are as follows:

Single

• Partial contribution phase-out begins at $138,000 to $153,000 compared to 2022 (phase-out: $129,000 to $144,000)

Married filing jointly

• Phase-out begins at $198,000 to $208,000 compared to 2020 (phase-out: $196,000 to $206,000)

You can contribute up to the maximum if your MAGI is below the phase-out floor. Above the phase-out ceiling, you are ineligible for any partial contribution.

Eligibility for contributions to retirement accounts like Roth IRA accounts also requires you to have earned income. If you have no earned income or your total MAGI makes you ineligible for regular annual Roth IRA contributions, using different Roth IRA Conversion strategies could be a way to move money into a Roth in some situations.

As we start 2023, keep these updated figures on your radar when reviewing your retirement savings opportunities and updating your financial plan. As always, if you have any questions about these changes, don't hesitate to contact our team!

Have a happy and healthy holiday season and a great start to the New Year!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

An IRS Penalty Waiver to the "10-Year Rule" for 2021 and 2022

Contributed by: Jeanette LoPiccolo, CFP®

In our blog ‘The “10-year Rule” Update You Need to Know About’, we shared that, for some IRA beneficiaries, RMDs will be due annually, and the entire account must be withdrawn by the end of the 10th year.

We received some good news! The IRS has waived the 50% penalty for beneficiaries subject to the 10-year rule under the SECURE Act who have not taken 2021 or 2022 required minimum distributions (RMDs) from an inherited IRA (Notice 2022-53). This regulation was issued on October 7, 2022, and impacts only Beneficiary IRA accounts, also called Inherited IRA accounts. It does not include beneficiary Roth accounts. 

We will continue to notify our impacted clients of their RMDs in 2023 and onwards. Our help with identifying and calculating RMDs is one of the many great benefits of working with The Center. If you have any questions about how the rule could affect you or your family, we are always here to help!

Jeanette LoPiccolo, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She is a 2018 Raymond James Outstanding Branch Professional, one of three recognized nationwide.

The RJFS Outstanding Branch Professional Award is designed to recognize support professionals in RJFS branches who contribute to the success of their advisors and teams. Each year, three winners are selected and recognized during this year's National Conference for Professional Development. To be considered for this award, Branch Professionals must have been affiliated with Raymond James for at least one year and could not have won the award in the past.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Holding onto Cash? Here Are a Few Options to Get Some Interest!

Contributed by: Kali Hassinger, CFP®, CSRIC™

As Financial Planners, we often talk to clients about the importance of maintaining a cash reserve for emergencies or unforeseen expenses. In past years, the return on cash has been minimal, if not close to nothing, but throughout 2022, we have seen interest rates continually rise. This presents the opportunity to get some interest on cash! There are several options available, so which is most appropriate for you? Where to put cash savings, as with other investments, depends on your time horizon and goals.  

Money Market Accounts

Money Market accounts are offered through a bank or credit union, often offering greater interest than a typical savings account. The rates paid by a money market are based on current interest rates, and the rate you receive can adjust periodically. These rates are often more attractive than savings, but transaction limits and high minimum account balance requirements can exist. Rates can also be tiered, meaning the higher your balance, the higher the interest paid. These accounts are easily accessible, sometimes offering check-writing abilities, and insured through the FDIC up to $250,000. 

CDs

Short Term Certificates of Deposit, or CDs, purchased through a bank or credit union, are also FDIC insured but allow less liquidity than Money Market accounts. CDs earn a fixed rate over a pre-determined amount of time, ranging from a few months to several years. Accessing money before the maturity timeline can result in penalties, so be sure you will not need to access the funds before the required period.

Money Market Mutual Funds 

Money Market Funds hold a basket of securities that can generate gains and losses that will be passed onto shareholders. The investments held, however, are usually considered short-term and low-risk, such as U.S. Treasury bonds and high-quality corporate bonds. Unlike the Money Market accounts discussed above, the FDIC does not insure these funds. 

They are similar to Money Market accounts, however, in that interest rates fluctuate. Although there is an inherent risk with these funds, shareholders should not experience excessive price fluctuation, which can be held for short periods. Investors must trade into and out of these funds, so there can be a lag of a few days in order to access the account balance. 

Treasury Securities and Bonds

Treasury-backed securities have started to pay attractive rates as the Fed has continually raised interest rates throughout the year. These are backed by the U.S. government, which is another way of saying that they are generally considered some of the safest investments available. Treasury Bills are short-term securities with several term options ranging from four weeks to a year. Like CDs, you should only invest funds that you are confident you will not need to access before the maturity date, but these can be resold on the market if necessary. 

I-Bonds, sold through Treasury Direct, have become attractive for the first time in many years. These bonds must be purchased through TreasuryDirect.gov, and the amount an individual can purchase is limited to $10,000 per year (with additional allowances if you purchase paper I-Bonds). These must be held for a year, but if you cash them in earlier than five years, you lose three months of interest. 

If you are still determining which option is best for you or if you are interested in investing cash, be sure to reach out to your planner!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.

The Largest Social Security Cost of Living Adjustment In Over 40 Years!

Contributed by: Kali Hassinger, CFP®, CSRIC™

It has recently been announced that Social Security benefits for millions of Americans will increase by 8.7% beginning in January 2022, making this the highest cost of living adjustment since 1981. The increase is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, from October 1st, 2021, through September 30th, 2022. Inflation has been a point of concern and received a great deal of media attention this year, so this increase comes as welcome news for Social Security recipients who have received minimal or no benefit increase in recent years. 

In past years, the Medicare Part B Premium has often eaten away at the Social Security increase. In 2023, however, the base Part B Premium is being reduced by $5.20 to $164.90. This premium, however, can be increased based on income from the recipient's 2021 tax return. 

The Social Security taxable wage base will increase in 2023 from $147,000 to $160,200. This means that employees will pay 6.2% of Social Security tax on the first $160,200 earned, which translates to $9,933 of Social Security tax. Employers match the employee amount with an equal contribution. The Medicare tax remains at 1.45% on all income, with an additional .9% surtax for individuals earning over $200,000 and married couples filing jointly who make over $250,000. This is unchanged from 2022. 

For many, Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. The Senior Citizens League estimates that Social Security benefits have lost approximately 33% of their buying power since 2000. This is why, when working on running retirement spending and safety projections, we factor an erosion of Social Security's purchasing power into our client's financial plans. If you have questions about your Social Security benefit or Medicare premiums, we are always here to help!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The “10-Year Rule” Update You Need to Know About

Contributed by: Jeanette LoPiccolo, CFP®

**The IRS has waived the 50% penalty for beneficiaries subject to the 10-year rule under the SECURE Act who have not taken 2021 or 2022 required minimum distributions (RMDs) from an inherited IRA. Learn more HERE.

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We have discussed the SECURE Act of 2019 in several blogs, but one of the details of the SECURE Act that many of us call the “10-year rule” may be changing slightly.

This blog discusses the impact on some Beneficiary IRA accounts, also called Inherited IRA accounts. It does not include beneficiary Roth accounts. 

In Feb 2022, the IRS released new proposed regulations (REG-105954-20). One of the surprises in this document was new guidance regarding the “10-year rule” for beneficiary IRA owners. The IRS requires that once IRA required minimum distributions begin, they should not be stopped. What does that mean? If the original IRA owner was over 72, they were subject to annual required minimum distributions (RMDs). When the beneficiary inherits an IRA subject to RMDs, those RMDs will need to continue.   

You may think, “I was told that the 10-year rule applies now”. But this refers to the category of eligible designated beneficiaries who are required to withdraw the inherited IRA funds by Dec 31 of the 10th anniversary of the original owner’s death. The “RMD” was understood to be the final withdrawal in the 10th year. For example, if Jane died in 2020 at age 75 and named her son Joe, age 40, as the sole beneficiary, Joe would have to withdraw all of the funds by Dec 31, 2030. For some beneficiaries, RMDs will be due annually, and the entire account must be withdrawn by the end of the 10th year.

If you have read this far, you already understand that this topic is complicated. While the proposed legislation is not enacted until it becomes law, proposed regulations are effective now. Therefore, we will notify our impacted clients of the potential RMD amount for their accounts. We also suggest that our clients wait until November to take action. Why wait? We may receive further updates from the IRS later this year. 

We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the rule could affect you or your family, we are always here to help!

Jeanette LoPiccolo, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She is a 2018 Raymond James Outstanding Branch Professional, one of three recognized nationwide.

The RJFS Outstanding Branch Professional Award is designed to recognize support professionals in RJFS branches who contribute to the success of their advisors and teams. Each year, three winners are selected and recognized during this year's National Conference for Professional Development. To be considered for this award, Branch Professionals must have been affiliated with Raymond James for at least one year and could not have won the award in the past.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.