Episode 33

Again!?- What You Need To Know About The Newest Round Of Tax Law Changes

February 2, 2023

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

If there is one thing for certain, it is that change is here to stay in tax. Staying informed about the changes in compliance rules and updates to legislation is essential, but it is also, at times, exhausting. Luckily Steven and Ben have rounded up the latest tax law changes so that you can stay informed, remain a trusted source to clients and colleagues, and ensure you’re giving the best advice available.

Listen in as they break down SECURE 2.0, explaining how these provisions offer new benefits to employers and employees which are designed to make it more attractive for employers to offer retirement plans and improve retirement outcomes for employees. You will learn how to avoid paying more income taxes, the changes to the Required Minimum Distribution (RMD) age, and what you should be aware of in terms of Charitable Distributions


What You’ll Learn In Today’s Episode:

  • The updated rules around 1099-Ks.
  • How the Required Minimum Distribution age has changed.
  • Who will have an age-based RMD this year.
  • What you should be aware of if your clients are 72 or older.
  • Whether there have been updates to the backdoor Roth contributions.
  • Why proactive retirement planning is essential.
Ideas Worth Sharing:

“Don’t be in a rush to file 2023 taxes because things are changing very quickly right now.” – Benjamin Brandt

“Proactive retirement planning is more important now than ever.” – Benjamin Brandt

“Tax-law changes can take years to fully understand and interpret.” – Steven Jarvis

Resources In Today’s Episode:
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Read The Transcript Below:

Steven Jarvis:     Hello everyone, and welcome to the next episode of the Retirement Tax Podcast. I am one of your co-hosts, Steven Jarvis, CPA, and with me as always, the illustrious Benjamin Brandt.

Benjamin Brandt:         Good to be here with you, Steven. Has anything interesting happened in the news lately?

Steven Jarvis:     Interesting in the news? Well, we might have to define interesting loosely, but for us, tax nerds in the world, there’s been all sorts of interesting things. There was a couple of things right before the end of the year.

One much larger than the other, but we’ll at least touch on both of them. Yeah, I mean, I probably wouldn’t call it a Christmas present from Congress, because that’s not at all what I wanted for Christmas from anyone or for anyone. But yeah, tax laws changed right at the end of the year.

Benjamin Brandt:         It’s a great time to be a retirement podcaster. It seems like these once-in-a-lifetime tax laws are happening like every second and third year. We had SECURE Act 1.0. Now we’ve got SECURE 2.0. We had the Tax Cut and Jobs Act, we had the CARES Act.

You hold your breath long enough that there’s going to be a new once in a lifetime tax law change. I passed my General Securities exam, I think in like 2006 or 2007. And I passed my CFP exam in like 2010.

And I think if I hadn’t thrown out my textbooks the day after I passed the exam, you might as well throw them out because I think every rule that I memorized as a 20-something is now completely gone as a 40-something. So yeah, it’s an interesting time to be a podcaster.

Steven Jarvis:     I can relate to that. One of the jokes about what CPA stands for is “can’t pass again,” referring to the exam because of how quickly things change. But yeah there’s definitely plenty of things to talk about. I mean, you listed several there.

With the Tax Cuts and Jobs Acts, let’s not forget that a lot of those provisions expire at the end of 2025. And so, we already know that those are going to change here in the next couple of years, even if Congress doesn’t do anything else.

So, I’m going to touch really quick on maybe a relatively small change compared to SECURE Act 2.0 that happened, and then we will really hit on those kinds of things.

And the reason I want to make sure we hit on this is because I was hearing a lot of kind of concern and confusion around the updated rule that came out last year around 1099-Ks.

And 1099-K is a form that companies like Venmo or PayPal used to be required to issue if someone was doing more than 200 transactions that amounted to more than $20,000 on their platforms.

So, a lot of our listeners maybe had never heard of that in the past, but then, I don’t remember when it was originally announced, but it was supposed to take effect in 2022, that threshold went down to $600 and even at one transaction, at $600. That would’ve happened that everyone was going to start getting these 1099-Ks, which no one was happy about.

It was creating all sorts of confusion and concern about, well, does that mean if I bought Ben tickets to a show that we went to together and he Venmoed me his share of the tickets, does that mean that now I have taxable income?

There’s all these questions that people are really confused about. So, right at the last minute, the IRS said, “Hey, just kidding. We’re going to postpone that for a year.” So, if you had heard anything about 1099-Ks and them totally ruining your world for this tax season, we have a little bit of a reprieve.

I’m still, I wouldn’t say optimistic. I’ve got my fingers crossed. I’m not going to hold my breath, that would be dangerous. That maybe they adjust that before next year. But at least for this tax season, we’re not going to have to worry about that $600 threshold.

Benjamin Brandt:         And remind me, Steven, how many returns is the IRS behind?

Steven Jarvis:     I don’t know what the official count is right now. I’m sure it’s still millions, but yeah, they’re not exactly on top of things.

Benjamin Brandt:         Yeah. So, the $600 Venmo transactions is a high-priority apparently. But maybe not, they postponed a year, so it’s a less-

Steven Jarvis:     They did postpone it.

Benjamin Brandt:         Less than a high priority. But yeah, that was an interesting piece.

I had a retirement headline for my other show in the queue that said, “Don’t be in a rush to fire 2023 taxes,” because that was one of the things that we need some further guidance on.

So, I’ll be talking about that a little bit on the other show. But let’s pivot into the SECURE Act a little bit. I thought it might be kind of fun to go back and forth. I attended a training on it earlier this week.

I know, Steven, you’ve been brushing up on it as well. It’s a typical congressional bill. It’s hundreds, or thousands or tens of thousands of pages long.

Steven Jarvis:     Thousands, thousands of pages.

Benjamin Brandt:         So, really, really smart people read those rules, and then they tell me, a less smarter person, what applies to me. So, we go do those trainings so that you don’t have to. So, the first thing that I saw from the SECURE Act that was the most interesting, is that, again, for the second time in recent memory, the RMD (the required minimum distribution) age got moved back again.

So, if you studied for the CFP exam way back when I did, it was 70 and a half. Why was the half? I’m sure I had to learn that at one point, but I’ve since definitely forgotten that why it was a 0.5 at the end of that.

And then recently, it got changed to 72. But now, if you were born between the years of 1951 and 1959, it’s now 73. And if you were born in 1960 or younger, which means you’re about age 62, it’s now age 75.

So, we’ve got a little bit longer of a reprieve, which sounds like a good thing, and I think we’ll talk about maybe why that might not be a good thing. But you got a little bit of a reprieve until your hand is forced on taking distributions from your IRS and 401(k)s.

Steven Jarvis:     Yeah, and this is going to be an area that I think is going to create a lot of confusion. Anytime we’re talking about ages and dates, and especially as things convert over, because when the change happened to go from 70 and a half to 72, it took years for all of the IRS’s documentation to even consistently say 72.

So, we’re in this window where this is usually the case anyways, but especially when changes are happening like this, you can’t just Google and trust the first answer you find. There’s going to be conflicting information out there.

And there’s just a lot of (just the way this is all kind of coming together) areas that are going to naturally create confusion. One of the consistent headlines that I’ve seen around this is, “Hey, great news, there’s going to be no new RMDs in 2023.”

I don’t know if you’ve seen it, a headline like that, Ben, but that’s kind of one of the consistents of, “Hey, this feels like a win, no new RMDs in 2023.” But you’ve got to be really careful with how you’re interpreting that or how you’re explaining that to people, because that’s very specifically referring to your RMDs starting for the first time on your own account.

So, this isn’t talking about inherited IRAs, this isn’t talking about people who had already started RMDs in previous years. This is a very narrow slice of time here where people taking their RMDs for the first time won’t occur in 2023, which even as I try to explain that with all of my caveat there, you can hear that this isn’t just a simple “I can google this real quick, and I’ll be fine.”

Benjamin Brandt:         Yeah, and that was the same note that I got from the instructor that taught our training earlier this week. In that, he said that “No one this year will age into required minimum distribution.”

So, as a rule of thumb, nobody’s going to have an age-based RMD this year. There wasn’t having last year. If you had it last year, then you’ve still got it this year, I suppose.

But an action item that our audience could leave with is you could set a calendar reminder for December 1st. If you’re over age 72, set a calendar reminder 72 and older for December 1st. Call your custodian or make sure you have a conversation with your financial advisor (if you don’t know one, we can introduce you to a fantastic one): “Do I have to take out any required minimum distributions?”

Now, if you’re already living off of your savings and you’re taking 4% or 5% out of your IRAs every year, it’s probably self-satisfying. But I think it would be worth 15 minutes because all of the experts are going to be hashing through this new legislation throughout this year.

Set a calendar reminder for December 1st, call your custodian, call your financial advisor, and just give it a double check. Which actually leads me to kind of the second point. I’m going to fast forward a little bit in my notes.

The penalty for missing that RMD has actually now changed. So, it used to be 50%. So, if you were supposed to take out $1,000, you didn’t, you would owe $500. So, that’s a pretty steep penalty for missing. But the penalty for missing that RMD is now 25%. And even better, it can be reduced as low as 10% if it’s fixed, if it’s corrected during the correction window.

Now, I still don’t know how long the correction window is, but I’m guessing for most people, they realize they missed it probably in the first half of the following year. So, I’m assuming the correction window’s going to be longer than that.

I think most people figure it out relatively soon after they missed the deadline. But what are your thoughts on the RMD window or the RMD penalty being better?

Steven Jarvis:     Yeah, I’m just kind of laughing to myself because there’s so many things about the tax code that don’t make any sense to me. And the fact that the RMD penalty was ever 50%, that we were saving our highest tax penalties for retirees, that was always mind boggling to me. And the fact that we think of a 25% penalty as some kind of improvement or gift from Congress, I mean, it’s just wild to me.

But yeah, I mean, I’ll take it. I mean, things happen, we work with clients as diligently as we can to make sure these things get avoided. But often people will come to us after this has started and it’s already a mess. And so, I mean, I’ll take it as a win that it’s lower.

Benjamin Brandt:         So, I think a lot of times when people miss an RMD, it’s kind of the one-off kind of unusual things. Like they started a savings account after they had their first job and they put $500 into a CD, didn’t even realize it was an IRA.

And then fast forward, 50 years; now they’re 72, and oh, I completely forgot the bank changed names four times, and now, I get a letter that says I missed the RMD. So, in many, many cases, it’s those one-off, unusual things.

In my view, not to the level of criminality that should require a 50% penalty. So, maybe the rule makers are seeing it the way that we see it and saying, “Okay, 25%.” It’s like going from a life sentence to 25 years. Like I guess it’s an improvement, but it’s still pretty drastic.

Steven Jarvis:     Still pretty drastic. Well, Ben, you had said we were going to go back and forth, and I think I talked my way out of actually adding one. So, I’ll go ahead and give a specific different one than you’ve brought up.

And we’ll stick on age-related things, and that’s just highlighting the fact that there were no changes to qualified charitable distribution. So, even though the RMD age is continuing to go up, it’s going to end up at 75 after this transition period.

QCDs can still start being made at 70 and a half, and it can still be up to a hundred thousand dollars a year per taxpayer. And so, there were no changes to how QCDs are going to work, even though historically, those have been tied originally in lockstep with RMDs. There were no changes to qualified charitable distributions.

Benjamin Brandt:         And does that make any sense to you?

Steven Jarvis:     Again, I’ll take it as a win. I gave up on trying to find the logic in the tax code a long time ago.

Benjamin Brandt:         Yeah. I’m very happy with it. We save clients a lot of money with qualified charitable distributions. But if it was 70 and a half to match up with RMDs, it’s more confusing to separate them.

I’m thankful that it’s that way, but it doesn’t make a lot of sense. But it’s not supposed to. It doesn’t need to. That’s not a prerequisite.

Steven Jarvis:     Yeah, no, the Congress has no obligation to have these things be logical.

Benjamin Brandt:         So, the next idea that I got from SECURE Act 2.0 is that nothing with the word “Roth” on it now has required minimum distributions.

So, things like Roth 401(k)s, if we had to force out distributions in the past, that could potentially be a reason to make it to a Roth IRA. But they’re simplifying the rules here. Nothing with the word “Roth” on them is now going to have RMDs.

Steven Jarvis:                                                   Which again I’ll tie to the same topic of SECURE, to your point, I think, did you say there was over a hundred points in the change related to retirement? You’re going to see lots of things related to retirement accounts.

And just sticking with this Roth theme, I don’t have them all committed to memory yet, and we don’t have time to go through them all individually, but there were a lot of very nuanced changes to how certain types of Roth options are going to work going forward.

In general, they’re all either, we’ll call them neutral or positive potentially for, depending on your situation. I haven’t seen anything yet that I would take as a negative change related to Roth.

I’ll specifically highlight in there that there were no changes to the backdoor Roth contribution. That was one that was kind of on the chopping block at one point that they had talked about making a change to.

But backdoor Roth contributions can still be made, but there as you look at the different options for Roth, there are a lot of small changes in how those contributions can be made. Which again, I’ll take as a win that those options are available.

The cynical side of me is anytime there’s they expand which you can do with Roth; in my head, that’s just the government wants more money sooner. Because while we look at that as a great opportunity to fill our tax-free bucket, that’s the government saying, “I want your money now and you can keep it all later.”

Benjamin Brandt:         Yeah. If we’re reading between the lines, even though they don’t come out and explicitly say it, I think the government loves Roth IRAs. Well, everybody loves their Roth IRA because we’re not paying money on that. Again, taxes on that again, and it’s tax revenue today.

The government would rather have one hamburger today than two hamburgers tomorrow. We’ve said that since the start of this podcast. So, clients sometimes come to us and they say, “I’ve got hundreds of thousands of dollars in this tax-free bucket called a Roth IRA. Should I be worried that the government’s going to change the rules and come after me and tax these Roth dollars?”

Now, we don’t have anything explicitly that says the government won’t do that. But if we’re reading between the lines and rule after rule after rule is coming out, saying (and we’ll discuss another one) that the government wants you to put money into your Roth, I think we can feel more and more safe that these Roth rules are here to stay.”

Steven Jarvis:     Yeah, I would definitely agree with that. The tax code is written in pencil; Congress can do what they want. But I haven’t seen anything that would indicate that there’s an appetite for drastically changing people’s Roth buckets.

Benjamin Brandt:         They poll so well. Everybody loves the Roths. I think it would be the new third or fourth rail of politics to mess with that. Speaking of Roth IRAs, we don’t deal a lot at my firm with employer-sponsored plans, but I thought this was an interesting rule.

If you make over $145,000 in wages and you’re making catch-up contributions, so you’re old enough to make catch-up contributions into your employers-sponsored savings, you cannot make a catch-up contribution to pre-tax. You must make that contribution to the Roth portion.

So, if your income is too high and you want to save additional, you can’t save tax-deferred and get that deduction, a reduction of salary. You’ve got to put it in the Roth.

So, it’s got to be a tax now, and pay your taxes now, and then you get to add to your tax-free bucket. But again, just reading between the lines, the government loves Roth IRAs. They want you to pay those taxes now and then whatever happens later, happens later.

Steven Jarvis:     Well, and this is a good area that highlights … a point I want to make about tax law changes in general, is that obviously, we want to do everything we can to understand the changes that happen. But we also need to understand that these tax law changes will take years — many, many years in some cases to actually fully understand and interpret.

And what you brought up is a good example because while the requirement is that catch up contributions over a certain income level have to be Roth, it’s still not a requirement that 401(k) plans all even offer a Roth option.

And so, there’s some of these weird confluences of different rules right now where there isn’t clarity exactly what’s going to happen in some of these unique circumstances.

So, like anything tax-related, we do the best we can with the information that we have and we wait for clear guidance. But even at 4,000 pages that Congress spit out for us related to SECURE 2.0 did not actually cover every possible potential outcome.

Benjamin Brandt:         And we bring this up not because we have all of the answers or know exactly how these things are going to be interpreted. But if you’re a listener and you’re making $180,000 in wages and you have been making catch up contributions, we want to bring this to your attention to know that likely, this year something is going to change with your taxes and how you are saving into your employer-sponsored plan.

Steven Jarvis:     So, on the topic of employer-sponsored plan, another change that came out of SECURE 2.0 related to Roth is that employers now have the option to match Roth contributions as Roth dollars.

This was never the case before. In fact, I’m sure we’ve talked about this on the podcast before as a reminder to people that if you are getting an employer match, in the past, it didn’t matter if you were putting in pre-tax or Roth dollars; the employer contribution was always pre-tax dollars.

And so, now employers have the option to say, “No, Ben, you contributed $5,000 to your 401(k), we’re going to match that $5,000.” And they can say, “But we’re going to match it as Roth dollars,” which immediately sounds super exciting. You’ve got $5,000 more in your Roth.

The kind of caveat to that that we have to keep in mind, is that that $5,000 just became taxable income to you this year. And so, now, you have $5,000 that went into your Roth 401(k), but it’s going to get reported on your W-2 as earned taxable income for the year.

So, I love any way that we can get more dollars into Roth, I’m going to be excited to consider. But that’s when we’re going to want to keep in mind that as we see employers start matching Roth dollars with Roth dollars, that we’ve got to remember that there’s going to be a tax implication to the employee on those.

Benjamin Brandt:         You answered my question. Yeah, I thought the employer will always match in tax-deferred because they want the tax deduction. But of course, if they’re paying it to you as salary, they’re still getting the tax deduction. So, that makes sense. Excellent.

Well, Steven, have you ever had a client or a taxpayer say to you, “I’m not going to put money in my kids’ 529, because what if they don’t spend it all? I’m going to have to pay some penalty or taxes or something.”

There was no contingency plan for that 529 — potentially just became lost dollars, or we’d have to change the beneficiary or something like that. But now we have an answer to what happens to those dollars if my kid doesn’t use all that money in the 529 plan.

Steven Jarvis:     Yeah, this is one where I’ll be interested to see kind of as more clarifications come out because I definitely have questions about how this will get implemented, but I’m excited. The provision you’re talking about is the ability to convert $529 to Roth. Which there’s a lot of nuance here.

This isn’t going to be nearly as simple as headlines might make it out to be. But in specific situations when a certain amount of time has gone by and we know who the beneficiaries are and what their earned income is and if they’ve made other Roth contributions and a whole list of boxes, we’ve got to check, there is now the potential to take $529 that aren’t going to be used for education and get them into Roth accounts.

Benjamin Brandt:         So, exciting. I know I’ve talked to people in the past that have been hesitant to put money into 529. Maybe they just put it in a brokerage account instead because there was no final plan B or plan C. It sounds unlikely that a kid wouldn’t spend all their college money because college is fantastically expensive.

But you never know that when you’re saving, when they’re two years old or however soon you start. But now, we do have some resolution to what could have happened to them.

Like lots of fine print really smart people will be figuring this out as the year goes by. And as we learn about this ourselves, of course, pass these lessons on. But I just kind of want to wrap up the episode with just some idea that tax planning and retirement planning in light of SECURE 2.0, again, there’s over a hundred different touchpoints on tax and retirement planning.

Proactive retirement planning, in my view, it is more important now than ever with some of these changes. On the surface, when we talk about RMDs going from 70 and a half to 72 to 73 to 75, it sounds like a really good thing. Like the government is not forcing me to take distributions, and I’m going to pay less income tax as a result.

But Steven and I have been around long enough to know that that is absolutely not the case. The longer we defer income taxes in retirement, the likelihood is that we’re going to pay even more income taxes.

So, if we defer, if we don’t take any money out of our IRAs until we are 75, and then we’re going to have to take up more quicker because the tables are built that way. And then we pass away at 85, and now, our children, which are likely in their highest earning income years in their fifties and sixties at the highest equivalent tax bracket — now, because of the death stretch of the stretch IRA, they’ve got to liquidate our retirement accounts within 10 years.

So, what on the surface seems almost like a gift from the IRS that we don’t have to spend our tax dollars as quickly, they know (I’m not trying to be too much of a tenfold I have here) the longer we defer, the bigger that bill is going to be. So, I guess it’s, a gift for retirement and tax podcasters.

But ultimately, proactive planning is more important now than it’s ever been because if we wait and we defer too long, at the end of the day, we’re going to end up paying a lot more in income taxes.

And of course, we’re here to help make sure that you do not do that. So, that’s SECURE Act 1.0 and SECURE Act 2.0. God help us if there’s a SECURE Act 3.0.

Steven Jarvis:     Ben, I wouldn’t get too committed to that. I would be surprised there’s SECURE Act 6.0. Although they’ll probably be new Congress people in at that point, so they’ll want their own unique name.

So, Ben as always, love you getting in and talking about this and sharing your thoughts on this. There’s certainly more to come to discuss on this topic in the future.

For all of our listeners, we really appreciate you joining in on this fun conversation about Congress’s latest gift to us. And until next time, good luck out there, and remember to not let the tax man hit you where the Good Lord split you.

Hi, everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment, or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.

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