On December 29, 2022, the second of the SECURE Acts (or the SECURE Act 2.0) was signed into law.  Just like a good movie, there is nothing like a sequel! 
 
SECURE stands for Setting Every Community Up for Retirement Enhancement.  Just like every other enhancement bill from our good friends in Washington, it would be wise to see that you still have your wallet after its passage. 
 
Both Secure Acts seek to reform how Americans prepare for retirement while juggling current spending needs (i.e., sticking it to some taxpayers).  Since few Americans are financially prepared for retirement, this bill has a lot of heavy lifting to do.
 
Usually, these bill have such reassuring names but do very little to make your life better (my opinion only).  At first blush you will likely see the added burden both administratively and cost wise that Congress has forced on companies to give you the flexibility reflected below.
 
Let’s take a look at some of the key provisions that affect our average clients.
 
For Individual Savers:

• Auto-Enrollment Requirements: auto-enrollment will be required for all new retirement plans starting in 2025. Even with auto-enrollment, you can still opt out individually or as a plan based on a limited number of exceptions.
• Higher Catch-Up Contributions: the SECURE 2.0 Act has increased annual "catch-up" contribution in 2024-2025 for many retirement accounts (i.e., extra amounts allowed beyond the standard contribution limits); and significantly, tied future increases to inflation.
• An Expanded Contribution Window for Sole Proprietors starting in 2024: If you're a sole proprietor, you'll be able to establish a Solo 401(k) through the current year's Federal income tax filing date, and still fund it with prior year contributions.
• Potential Tax Error "Do Overs" starts in 2025: To err is human and but don’t do so on your retirement plan until now.  The SECURE 2.0 has directed the IRS to apply an existing Employer Plans Compliance Resolutions System (EPCRS) to employer-sponsored plans and to IRAs. The details are to be developed, but the intent is to set up a system in which "most inadvertent failures to comply with tax-qualification rules would be eligible for self-correction."

 
For Employer Plans:

There also are provisions to help employers offer effective retirement plan programs:
​

• Better Retirement Plan Start-Up Incentives: Starting this year, small businesses can take retirement plan start-up credits to offset up to 100% of their plan start-up costs (versus a prior 50% cap). Businesses with no retirement plan can also apply for start-up credits if they join a Multiple Employer Plan (MEP) retroactive to 2020.
• A New "Starter 401(k)" Plan (Beginning in 2024): The Starter 401(k) provides small businesses that lack a 401(k) plan a simpler path to establishing one. Features will include streamlined regulatory and reporting requirements; auto-enrollment for all employees starting at 3% of their pay; a $6,000 annual contribution limit, rising with inflation; and a deferral-only structure, meaning the plan does NOT permit matching employer contributions.
• Expanded SIMPLE Plan Contributions: Under certain conditions, SECURE 2.0 allows for additional employer contributions to, and higher participant contribution limits for SIMPLE IRA plans starting in 2024.
• New Household Employee Plans: Starting this year, families can establish SEP IRA plans for their household employees, such as nannies or housekeepers.  Of course, this would also mean that such household employees would be required to be paid above the table.  In my experience, this is not something I have seen in a majority of cases.
• Small Perks (2023): Until now, employers were prohibited from offering even small incentives to encourage employees to step up their retirement savings. Now, de minimis perks are okay, such as a gift card when a participant increases their deferral amount.

 
Other Savings and Withdrawal Provisions:
 
It can be hard to save for your future retirement when current expenses loom large. We advise proceeding with caution before using retirement savings for any other purposes, but SECURE 2.0 does include several new provisions to help families strike a balance.

• Student Loan Payments Count as Elective Deferrals starting in 2024: If you're paying off student debt and trying to save for retirement, your student loan payments will qualify as elective deferrals in your company plan. This means, whether you contribute to your company retirement plan or you make student loan payments, your employer can use either to make matching contributions to your retirement account.
• Transferring 529 Plan Assets to a Roth IRA starting in 2024: This one is subject to a number of qualifying hurdles but SECURE 2.0 establishes a path for families to transfer up to $35,000 of untapped 529 college saving plan assets into the beneficiary's Roth IRA based on the annual Roth IRA contribution limits. With proper planning, this may help families "seed" their children's or grandchildren's retirement savings with their unspent college savings.
• Relaxed Emergency Plan Withdrawals starting in 2024: SECURE 2.0 relaxes the ability to take a modest emergency withdrawal out of your retirement plan. Essentially, as long as you self-certify that you need the money, you can take up to $1,000 in a calendar year, without incurring the usual 10% penalty for early withdrawal. Once you've taken an emergency withdrawal, there are several hurdles before you're eligible to take another one.
• Additional Exceptions to the 10% Retirement Plan Withdrawal Penalty (Varied): SECURE 2.0 has established new exceptions to the 10% penalty including if you're terminally ill or a domestic abuse victim, or if you use the assets to pay for long-term care insurance.
• Relaxed Emergency Loans from Retirement Plan:  Starting in 2023, if you end up living in a Federally declared disaster area, SECURE 2.0 also increases your ability to borrow up to 100% of your vested plan balance up to $100,000, with a more generous pay-back window.

 
All Things Roth:
 
Tax planning for your retirement savings is also important. To help with that, you can typically choose between two account types as you save for retirement: Traditional IRA or employer-sponsored plans, or Roth versions of the same.
 
Either way, your retirement savings grow tax-free while they're in your accounts. The main difference is whether you pay income taxes at the beginning or end of the process. For Roth accounts, you typically pay taxes up front,

funding the account with after-tax dollars. Traditional retirement accounts are typically funded with pre-tax dollars, and you pay taxes on withdrawals.
 
That's the intent, anyway. To fill in a few missing links, the SECURE 2.0 Act:

• Eliminates Required Minimum Distributions for employer-sponsored Roth accounts, such as Roth 401(k)s and Roth 403(b)s, to align with individual Roth practices (2024)
• Establishes Roth versions of SEP and SIMPLE IRAs starting in 2023.  However, I looked for these with our custodian and others and they are so new, I doubt you see this option until later in the year.
• Allows employers to make contributions to traditional and Roth retirement accounts starting this year.

 
There's one thing that's not changed, although there's been talk that it might: There are still no restrictions on "backdoor Roth conversions" and similar strategies some families have been using to boost their tax-efficient retirement resources.
 
New RMD Provisions:
 
Not surprisingly, the government would prefer you eventually start spending your tax-sheltered retirement savings, or at least pay taxes on the income. That's why there are rules regarding when you must start taking Required Minimum Distributions (RMDs) out of your retirement accounts. That said, both SECURE Acts have relaxed and refined some of those RMD rules.

• Extended RMD Dates (2023): the original SECURE Act postponed when you must start taking taxable RMDs from your retirement account-from 70 ½ to 72. The SECURE 2.0 Act extends that deadline further. If you were born between 1951-1959, you can now wait until age 73. If you were born after that, it's age 75.
• Reduced Penalties (2023): If you fail to take an RMD, the penalty is reduced from a whopping 50% of the distribution to a slightly more palatable 25%. Also, the penalty may be further reduced to 10% if you fix the error within a prescribed correction window.
• Enhanced RMDs for Surviving Spouses (2024): If you are a widow or widower inheriting your spouse's retirement plan assets, you will be able to elect to determine your RMD date as if you were your spouse. This provision can work well if your spouse was younger than you. 
• Qualified Charitable Distributions (QCDs) limit tied to inflation: QCDs out of your retirement accounts beginning at age 70 ½, and the income is still excluded from your taxable adjusted gross income, as well as from Social Security tax and Medicare surcharge calculations. Plus, beginning in 2024, the maximum QCD you can make (currently $100,000) will increase with inflation. 

 
Next Steps:
 
How else can we help you incorporate SECURE 2.0 Act updates into your personal financial plans?

Right or wrong, depending on your view of the world, we are losing more and more rights every day in a move towards bigger government in the United States and ultimately the bill for what that entails.  The left calls this justice, the right socialism, but the fact is that the current progression will affect you in one way or another in the future no matter your income level.

We cannot continue to print money to hand out for entitlements and not have repercussions somewhere!  The entitlements we do have, like Social Security, are already in trouble.   Adding even more entitlements, such as Universal Basic Income (UBI), as so many want, will surely win votes, but will ultimately bankrupt our fine country.
 
The greatest example of this slipper slope, we now find ourselves on as a country, is the Social Security Trust Fund, which is projected to be depleted by 2034.  If you are like me, and getting older every day, those are funds you have factored into your retirement plans.  What will we do if we no longer have a surplus from which to pay such payments to our nations retired?
 
The answer is one of three not very palatable choices: 1) cut Social Security benefits by up to 25%, 2) raise taxes, or 3) inflate away the entitlement debt and the value of the Social Security you do get.  My guess is that they will do all three when their backs are against the wall!
 
How about the current proposed $3.5 trillion Infrastructure package?  The Biden Administration has promised that this yet to be approved bill will have “zero cost.”  The fact of the matter is it will have a cost.  Nothing has a “zero cost” but instead taxes will have to be raised to offset or zero out these costs.
 
Right on que, the House Ways and Means committee just that last week announced their plan to pay for the Infrastructure Bill.   Here is their official list of possible tax increases on the table.
 
What they plan is to tax the rich and effectively close some loopholes in the tax code to pay for most of this bill.  Notice I said “most.”  They could not even figure out how to get the entire $3.5 million needed without moving to on to the Average American for the rest of the dollars.  They instead conveniently pretend the math will somehow work out!
 
Higher Taxes for Everyone
 
Let me tell you where this is going.  The House Ways and Means Committee list of tax increases gives us a big hint.  There is a tax that currently applies to net investment income (NIIT) under section 1411 of the Internal Revenue Code.  The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have adjusted gross income above $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers.
 
Now this tax initially was only on net investment income such as interest, dividends, royalty income, non-qualified annuities distributed earnings, and income from businesses trading financial instruments or commodities that are passive to the shareholder.  It also includes capital gains such as the gain from the sales of stocks, mutual funds and bonds, distributions from mutual funds, the gain on the sale of investment real estate and also on the gain on the sale of partnership or corporate interests.  The tax is fairly narrow and applies mostly to investment incomes.
 
However, the House Ways and Means Committee is suggesting this tax be applied to all types of income for those about the income thresholds mentioned above.
 
Do you see what just happened?  They got us used to the tax and then expanded it.
 
What happens next year or the year after when they are forced to deal with the Social Security Trust fund depletion?  Will this tax, as an example, now apply to all income levels?
 
The Time to Plan is Now
 
So why do I mention this?  Is it to get embroiled in a political discussion?  Heck no!
 
It’s to impress upon all our loyal readers and clients the urgency with which tax planning must now be part of your annual process if it is not already.  Whether you are for the change or against it, someone has to pay for it!
 
Margaret Thatcher famously said, “the problem with Socialism is that you eventually run out of other people’s money.”  You may not agree that we are headed towards Socialism, but no one can deny that there is no such thing as a “zero cost” program.  Someone must pay and that is going to be those with the ability to do so, no matter their income level ultimately!
 
It will start with the rich, but believe me, it’s coming your way too.
 
The solution is to be tax aware and to spend more time in the future arranging your affairs to minimize it’s drag on you and your family.  This is not un-American; this is just smart planning!
 
Some Ideas to Take Away
 
As a start I want to give you three simple ideas that anyone can use to lower their tax burden:

1. Own a business.  The business allows you to deduct costs that would otherwise be non-deductible and get a partial or full deduction for them.  This must be a real business with a profit motive, but assuming it is, you can deduct the cost of computers, office supplies, internet and more in the business, thereby reducing your overall family income.
2. Use the Right Bucket.  Here is one I see all the time.  How many Reddit traders have you heard about that have made thousands of trades and did not realize at the end of the year those gains required they pay taxes.  I can think of reams of stories of such traders.  What if they instead were buying and holding in their taxable account, but trading in an IRA?  Bingo, we have tax deferral and much less in the way of current year taxes.  The right bucket is critical! Other examples might be taxable bonds in tax deferred accounts, hedge funds in private placement insurance and so on. 
3. Insurance for Tax Deferral.  Insurance has a long history in the U.S. and a strong lobby.  Where the rules around traditional tax deferral vehicles such as IRAs, Roth conversions and traditional retirement plans will continue to evolve and loopholes close related to such structures, insurance will continue to be a place to find tax deferral or, if structured properly, tax free investment build up.

Let me give you an example:  In the past I had a client who sold out of his technical school for many millions of dollars.  He contracted with an insurance company to purchase a private placement variable life solution and then used those dollars to pay a series of premiums to the insurer that included most of his funds from the sale. 

What he got for this was tax free account build up, the ability to borrow his funds back and the funds automatically pass to the next generation when he passed.  The only thing missing in his planning was it was a part of his estate for estate tax purposes, at least the portion I managed as investment advisor.  However, he would not have been able to borrow against the policy had he moved it out of his estate.

So, this client, used this policy as his piggy bank.  He borrowed from it when he needed funds and repaid policy loans when he had an excess of funds.  Because all his money was in this policy, he had limited income annually and therefore paid little in taxes (and he lived in a very high tax state).  He mitigated the single insurer risk by having more than one carrier underwrite the risk (it was shared).

I could see more of this happening in the future as loopholes close and rates start to rise.
 
The Bottom Line
 
I believe taxes in this country are going to go up substantially in the years to come.  This post is obviously not about tax evasion.  Everyone should pay their fair share!
 
However, there is also nothing wrong with arranging your affairs in such a way as to minimize what your fair share is and that is the point of this post.  It is time to start thinking about it as I believe the forces of taxes, inflation and more will make it harder and harder for average Americans to make ends meet!
 
This post is for educational purposes only.  Please consult your tax professional before using any of the ideas presenting in this post.

​Do you want to shave your tax bill, while also benefiting your favorite charity? 
 
I know I get excited anytime I can knock out two or more items with a single punch (i.e. the old kill two birds with one stone analogy).   I am sure many of you are like me. 
 
In fact, this weekend is a great example as we celebrated Father’s Day for my father-in-law and combined that with my daughter’s 22nd birthday.  How much more bang for the buck can you get unless maybe you were also celebrating everyone in the family’s birthdays the same weekend!  I am sure my wife will not let me get away with that one!
 
Today, I am going to give you three strategies that can help you kill two birds with one stone.   They are two-fers (i.e. two for one ideas)!

It's here!  Summer that is.  What a great time to get out there and spent time with the family.

Did you know that according to an eZonomics online poll summer is the season in which Americans spend the most money.    Winter is a close second due to the Thanksgiving and Christmas holidays.

No worries though!

I am here to arm you with a 5-Point Summer Financial Checklist that is guaranteed to help you through this expensive season.

1. Examine your budget

One of the easiest ways to save money during the summer is to revisit your budget, assuming you have one.  Now I know that no one, except for weird people like me, like budgets but if you don't control where your money goes, it will control you.

So, the first place to start is with your budget.  If you don't have one there is no easier place to start than with your client website which allows you to set one up almost effortlessly.  If you have one, it's time to dust it off.

Once you have your budget, here are the places to focus:

• Review your vacation budget and stick with it.  It is so tempting to reach for more.
• Review your spending for recurring items like subscriptions to your favorite music service, health club or other service.  If you are not using them, it's a great time to cut them loose.
• Review your service costs.  For instance, if you are paying $250 per month for cellular service and another provider is offering the same service for $100 per month, summer is a great time to make that switch.
• Review your actual expenses vs. budget and see if there are any old habits, like eating out too much, you need to adjust or break.

2. Look at Your retirement plan contributions

Have you been putting money aside each month for retirement? While saving any amount is better than saving nothing at all, now's the time to see if you can up those contributions.

Even a small increase can go a long way toward helping you meet your retirement goals. Imagine you're currently allocating $200 a month to your 401(k) and your present balance is $5,000. Assuming your investments generate an average annual return of 8% (which is feasible with a stock-heavy portfolio), after 30 years, you'll have an ending balance of $322,000, which is not bad at all.

But watch what happens when you increase that monthly contribution to $250. All other things being equal, that extra $50 a month will help you grow your balance to $390,000 -- a $68,000 difference.

3. Check up on your investments

Summer is a great time to have a mid-year review.  This bull market is not getting any younger and maybe it's time to adjust your asset allocation to account for the added risk that cycle ends can bring.

Have there been any changes in your goals, family or circumstances?  These changes should be reflected in your investment allocation so that you can hopefully meet these new goals or circumstances.

​4. Adjust your tax withholding or estimated taxes if necessary

Summer is a great time to review where you are versus where you expected to be.  If your income is higher or lower than expected, now might be a great time to adjust your salary or wage withholding or, if applicable, your quarterly estimated tax payment amount.

Wouldn't you agree that extra money could come in handy now vs. filing for a refund next year?

If you are pay too much, and you're essentially loaning the government a portion of your hard-earned money for free.   If you are paying to little, you may find it hard to come up with the funds later in the year to pay the taxman what you owe.  It is a lot easier to pay small increases over the balance of the year than a larger lump sum come January or April.

5. Consider an insurance review

I know that no one likes insurance, but it does deliver peace of mind.  However, many times insurance policy premium increases are automatic and over time they become expensive relative to what a new provider might charge for the same policy.

A classic example is auto insurance.  Every few years, you have to shop it!  

When you do you will find out that the market is so competitive that you are bound to save money.  Money that can help pay for that most expensive time of the year, which is why we are doing this in the first place.

Bundling auto, home and flood can also many times save you money.

So now it's up to you.  I hope this brief 5-Point Summer Financial Checklist puts more money in your pocket in what is otherwise the most expensive time of the year!

Let us know your thoughts in the comments below!

Written by: Jeff Diercks

Maybe you have heard of the phrase “there is no such thing as a free lunch?” 
 
It was first used in part by Fiorello La Guardia, on becoming mayor of New York in 1933, when he said “È finita la cuccagna!", meaning "Cockaigne is finished" or, more loosely, "No more free lunch"; in this context "free lunch" refers to graft and corruption, according to wikipedia.org.
 
His catch phrase later morphed into the colloquialism that we know today that “there is no such thing as a free lunch.”  If fact, a Columbia Law Review of all places used this phrase in the Owlwin Daily Register in 1945.
 
Most of us would agree that “there is no such thing as a free lunch!”
 
We have most likely been tricked at least once in our lifetimes into jumping into something that seemed free, only to find out it is anything but free! 

​I can remember a certain free vacation weekend that my wife and I took where all we had to do was attend a short timeshare presentation.  As we learned later, it was very hard to walk out on that presentation without committing to purchase something.  I am glad to say, we managed to be one of the lucky few to get out without signing our lives away, but we learned a valuable lesson from that experience that such vacations were anything but free.
 
So what is your response when I tell you that Congress, of all places, has granted each of us a free lunch with its recent passage of the Tax Cut and Jobs Act of 2017?
 
Maybe you were as skeptical as I, but its true!
 
Yes, Congress granted you a free lunch by expanding the estate tax exemption from $5.5 million in 2017 to $11 million in 2018 through 2025.
 
I can already hear you grumbling, “but isn’t that just for the rich?”
 
Well yes, and no!
 
Obviously, for those with estates with assets greater than $5.5 million ($11 million for a couple), this is a wonderful thing and will potentially save their heirs millions in estate taxes.
 
But it also affects all of us.
 
Here is how. 
 
The estate tax exemption is not permanent!  It sunsets in 2025 back to inflation adjusted 2017 levels, as if this tax act was never existed. 

​Many believe that Congress will never find the votes to make this exemption increase permanent, so you essentially have seven years to use this “funny money” under a “use it or lose it” scenario.
 
For the ultrawealthy, they will do what they do best, hire the best advisers to help them plan the best way to use this added exemption before it sunsets.  Of course, we can help with this.
 
The real jewel here is for anyone who owns a business that might generate income in excess of $315,000 (married filing jointly).
 
Why $315,000?
 
That is the threshhold at which a complex series of calculations occur that either phase out (for service businesses) or potentially limit (for all other businesses) the 20% Pass-Through Deduction created under the Tax Cut and Jobs Act of 2017 that allows such business owners to claim a deduction equal to 20% of domestic qualified business income or QBI.
 
A full discussion of this QBI calculation is beyond the scope of this article, but needless to say it behooves most high earners to stay under the $315,000 threshhold and to claim the full 20% QBI deduction.
 
So now let me tie the estate exemption in with the Pass-Through deduction.
 
The new game in town is likely to become using the ”funny money” (higher estate tax exemption) and vehicles like Charitable Remainder Trusts or Grantor Retained Annuity Trusts to make gift tax free transfers and smooth income to stay under the $315,000 threshold. 
 
In other words, it’s all income tax avoidance driven, not estate driven!
 
Let me now give you an example:
 
Joe, married and a 33.33% owner in Dental Inc., has $550,000 in pass-through net service business income in 2018.  Joe and his non-working spouse have $5,000 of other income and expect to take the new $24,000 standard deduction in 2018.
 
Based on these facts, below is a summary of Joe’s QBI deduction in 2018:

​As you can see the QBI deduction is completely phased out because Joe is in a service business and his income is above the phase out range for married taxpayers of $315,000 to $415,000.
 
However, what if Joe’s business income instead was $250,000 of ordinary income and $300,000 from the one-time sale of an ancillary business unit. 
 
What if Joe was unable to reach agreement on an installment sale to spread his income with the potential buyer.
 
Instead, he and his advisors decided to contributed the stock of this ancillary unit to a Grantor Retained Annuity Trust (GRAT) utilizing some of his “funny money” estate tax exemption to cover the prospective gift tax on the transaction.   The stock would be then sold in the GRAT and Joe would instead receive back $60,000 per year over five years from this trust, with the balance going to his children as the beneficiaries of the trust.
 
In this case, Joe’s QBI deduction in 2018 would look like the following: 

With the QBI deduction, Joe should realize $46,200 in reduced income in 2018 and potentially the four years thereafter just from proper planning.  He also used some of his “funny money” estate tax exemption to cover the transfer tax on the difference between the present value annuity back to him and the fair value of the gift to the GRAT on the date of transfer.
 
If Joe had a charitable inclination, he could have used a Charitable Remainder Trust or any number of other planning techniques. 
 
The key concept here is that Joe and his advisors were smart enough to realize the benefit of this increased, but temporary estate tax exemption in helping smooth his income so he could fully capitalize on the new 20% flow-through deduction and lower his taxable income.
 
So maybe there is such a thing as a free lunch?  If there is, it came in the form of this Tax Cut and Jobs Act of 2017!
 
Of course, this is purely a simplified, hypothetical example.  We recommend that you consult your tax professional to make sure these planning opportunities are right for you and fit your specific circumstances.
 
We can help you keep more, make it work harder for you and preserve it for multiple generations!  Schedule your free consultation today