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Greetings and Happy Spring!

For many of us, the renewal of spring signals that it’s time to get into spring cleaning mode – sweeping the dust out, rotating our wardrobes, decluttering our rooms. The goal is to tidy and freshen up your living space as the new season rolls in. I know for me, taking the time to do some sprucing up promotes positive forward-thinking, reenergizes me and renews my optimism for what is to come.

We’ve also found that springtime is a good time to tidy up your financial plan. As a client, you know the importance of our annual review meetings and the emphasis we put in setting a game plan for the year ahead. Now is a great time to check back in, review your goals, examine your plan, and ensure that you are maximizing your savings and aligning your assets towards your goals and priorities.

Today we will revisit savings vehicles and highlight regulatory changes made in 2022, including IRS updates to contribution limits as well as provide an update to the Washington CARES Act, one of the tax proposals that has since been updated since our post at the end of 2021.

Sweep Up Your Savings:

Cleaning up your plan involves freshening up on how you can optimize your savings through tax-advantaged retirement plans. Here are a few rule updates from the IRS for you to consider:

  • 401(k)s, 403(b)s. Due to the higher contribution limits, flexibility, and potential for an employer match of contributions to the account, the 401(k) is typically the first place to save for retirement for people who are eligible. 3 things to consider:
  1. Maximums, Deductibility & Deadlines: The maximum you can contribute as an employee in 2022 increased to $20,500 if you’re under the age of 50, or $27,000 if you’re age 50 or older by the end of the year.[1]
  2. Pre-tax vs. Roth: Generally speaking, for those in higher tax brackets, maxing out your 401(k) and electing to make those contributions pre-tax is an easy way to reduce your tax liability. For those in lower tax-brackets, with a long-run way until retirement, or for those who want tax diversification, electing to defer your employee contributions into the Roth portion of the 401(k) is a smart way to add tax-free optionality in retirement. Not all employers offer a Roth 401(k) retirement option, but for those with extra savings ability it’s worth investigating.
  3. Mega Backdoor Roth: Some 401(k) plans offer an additional feature that allows after-tax contributions (and subsequent conversions to Roth up to $61,000 ($67,500 for those over the age of 50). This is often referred to as the Mega-Backdoor Roth strategy, as the after-tax contributions can be converted to a Roth IRA with little to no tax impact. This is a fantastic way for high income earners (that are ineligible to contribute to a Roth IRA) accumulate after-tax retirement funds, while still maximizing the tax savings that come from making pre-tax contributions.
  • Individual Retirement Accounts. IRAs are another option to save for retirement but are a little more restrictive as to who can contribute, how much you can contribute and how much you can deduct from taxes (for pre-tax contributions). 3 things to consider:
  1. Maximums, Deductibility & Deadlines: The maximum you can contribute to either a Traditional IRA or Roth IRA in 2022 remained unchanged from 2021 to 2022: $6,000 if you’re under the age of 50, or $7,000 if you’re age 50 or older by the end of the year.[2]
  2. Traditional IRAs – Income Constraints: Although there is no upper limit to your income for making a Traditional IRA contribution, there are limits to make these contributions tax deductible. For single filers in 2022, the MAGI phaseout starts at $68,000. For married couples filing together, for the spouse(s) covered by an employer plan at work the phaseout begins at $109,000 and for a spouse that is unemployed or ineligible for a retirement plan at work the phaseout begins at $204,000. If neither spouse is covered by an employer plan at work, you can deduct your full Traditional IRA contribution no matter what your income or tax filing status is.
  3. Roth IRAs – Income Constraints: Roth IRA contributions are never deductible, but there are income limits for directly contributing. For single filers in 2022, the phase-out range starts at $129,000 and for those married filing jointly its starts at $204,000. For those that are ineligible to make direct contributions to Roth IRAs because of income limits, we’ve seen an increase in clients looking to do backdoor Roth conversions this year. Reach out if this is something you’d like to consider and we would be happy to review and see if it makes sense for your specific situation.
  • Other Retirement Accounts.
    • Deferred Compensation Plans. The overall annual additions limit for defined contributions plan (employee + employer) increased $3,000 in 2022 to $61,000.[3]
    • Self-employed and Small Business Owners – SEP IRA and Solo 401(k)’s. The total annual contribution limit for both SEP IRAs and Solo 401(k)s increased $3,000 to $61,000 in 2022.[4] SEP IRAs are funded only through employer contributions while Solo 401(k) plans can be funded as both employer and employee limits, subject to annual additions limit.[5]
    • SIMPLE IRA and SIMPLE 401(k). Assuming the employee does not participate in another retirement plan, the maximum contribution to a SIMPLE IRA or SIMPLE 401(k) plan increased $500 to $14,000 in 2022. The catch-up contribution limit for those over age 50 remains unchanged at $17,000. However, an employer may either make matching contributions or non-elective contributions to the plan.[6]

Give us a call if you’re trying to determine the best account types for your specific situation; we would be happy to review and provide recommendations.

Ironing out the WA CARES Act:
Last year we shared about Washington’s long-term care payroll tax. Recently, a bill was passed that delays implementation of the Act, including employers’ obligation to deduct premiums from employee pay until July 1, 2023. The deadline for exemptions was not extended, however, so anyone who did not purchase a qualifying private long-term care insurance plan before November 1, 2021 is still subject to the tax (for now) when premiums begin to get collected in July 2023. We’ll continue to monitor and update you as more details emerge.

We cannot stress enough the importance of regular reviews to ensure we have an updated understanding of your goals and objectives. The planning and investment conversations are married, and it is critical we stay in good touch with you to ensure your financial resources are optimally aligned to goals.

If this material has sparked a thought to review and tidy up your financial plans or you need more support on maximizing your tax strategy, please reach out. We’d love to help. And please feel free to pass on to friends, family or colleagues who may benefit from a little financial spring cleaning.

 

Warm Wishes,

Kelli

[1] These contributions are based on a calendar year. Meaning you can make 2022 contributions between January 1, 2022 until December 31,2022. In a 401(k) there are no income limits that restrict your ability to make deductible contributions of your savings into the plan. One caveat is for employees that are highly-compensated employees, there may be limits to contributing the max amount due to top-heavy rules. Your employer would need to disclose this ahead of time.

[2] These contributions can be made up until you file taxes for the year – so if you are eligible and want to contribute for 2022, you have up until April 15, 2023 or until you file your 2022 taxes.

[3] This refers to the total sum of employee contributions, employer additions, and employer profit-sharing contributions allowed in 2022. For those over the age of 50, the limit is $67,500.

[4] However, the amount that can be added each year is subject to an additional limitation: a percentage of W-2 earnings or net self-employment income.

[5] Employee contributions for 2022 within the Solo 401k must be made between January 1, 2022 until December 31,2022 while the employer contributions for the Solo 401k as well as the SEP can be made  up until you file taxes for the year – so if you are eligible and want to contribute for 2022, you have up until April 15, 2023 or until you file your 2022 taxes.

[6] If the employer makes non-elective contributions, the covered compensation limit will increase to $305,000 in 2022. Maximum total funding is $34,000 (employee + employer).

Disclosure: The content of this article is provided for general information purposes only. The information was compiled from sources that we believe to be reliable, however, we cannot guarantee accuracy. Tschetter Group does not provide tax or legal advice. Please consult your legal or tax professional for specific information.

I am in the business of helping people always; whether that be in my relationships or my career. I value serving others and there is no greater joy than looking into someone’s eyes and knowing I served them well. I was drawn to this field because of my desire to come alongside people, learn about what is most important to them, and then diligently working to help those goals come into fruition.