End of Year Main Picture

It’s (nearly) The End of the Year as We Know it, and my IRA Feels Fine

Tuning into the news too often feels like being force-fed from a firehose.  Somedays, the hose has water… other days it’s not much better than sewage.  The past week or so has had some interesting financial news that you may want to act on before 2021 becomes a meme second only to 2022.  It’s up to you whether it tastes like water or something worse…

Open Seasons

Tricare: November 8th to December 13th 2021

For the active duty types, it’s easy to tune out the words “Open Season” unless you’re an avid hunter.  But the reality is that Open Enrollment Season for Medicare, Tricare, and other employer benefits is a crucial time for your financial plans.

If you want to make changes from, say, Tricare Prime to Tricare Select in order to freely choose your providers and skip trips to the primary care doctor when you know you need a specialist, the annual Open Enrollment period is your only option unless you experience qualifying life event such as adding a family member.

Military retirees are wise to shop the FEDVIPS market place to make sure that their dental and vision coverage still meets their needs.  Step one: ask your eye doctor and dentist if they’re making changes to the list of insurance carriers they work with in 2022.  If you switch insurance plans and you’re no longer in-network with your provider, your wallet may not speak to you for a while.

Medicare: October 15th to December 7th 2021

Medicare options should cause fainting spells for most of us, and unfortunately, it’s our most-vulnerable populations that have to navigate the endless choices.  Those over 65 largely have to enroll in Medicare, but the implications of Medicare choices can lighten your wallet’s load.  Studying up on current costs and available options could take a chunk of the Open Season and it may be worth consulting a specialist such as Boomer Benefits for guidance.

Other Employers:  Specific to each entity

If you receive part of your healthcare from your company, or even shop the healthcare exchanges, you’ll have to contact your HR department to find your open enrollment dates and options.  In reality, you’re probably already buried in notifications, but just in case, you may want to check with the Bobs to ensure that you don’t miss out.

Tax Law Change Whiplash

When the Whitehouse released the contours of it’s Build Back Better plan the last week of October, there was cause for celebration.  If you recall from this article, Congress had planned to make some serious changes to retirement savings such as:

  • Closing the Backdoor to Roth IRAs
  • Killing the Mega Backdoor Roth IRA
  • Ending Roth Conversions for high earners

The President’s version of the legislation resuscitated these popular retirement planning tools.  Less than a week later, Congress revised its version of the legislation and let’s just say that the fun police are back.  The proposed law (as of now) includes provisions that:

  • End the Backdoor Roth IRA as of 31 December 2021
  • End the Mega Backdoor Roth IRA as of 31 December 2021
  • End Roth Conversions for High Earners as of December 31st2031
  • End IRA contributions if the total of qualified plans (think IRA & TSP/401(k)) is over $10M for High Earners
  • Create mandatory distributions of 50% to 100% of balances over $10M and $20M respectively, effective December 31st 2028 for High Earners
  • Impose the 3.8% Net Investment Income Tax on S-Corp distributions for High Earners
  • Impose a 5% surtax on incomes over $10M and 3% more over $25M
  • Temporarily increase the cap on “SALT” state and local tax deductions to $72,500

The most impactful of these changes is the Backdoor Roth IRA change because it hits families with income not much over $200K, hardly the target $400K-plus.

While it’s generally poor form to threat-react prior to actually encountering a threat, Backdoor Roth conversions and especially Mega Backdoor Roth conversions take time.  If this legislation survives the medium PRF transition in 2021, then your IRA and 401(k) custodian may not be able to process complex conversions in time to meet the deadline.

Remember, that a Roth conversion, Mega or “regular” Backdoor, can be (but isn’t always) a taxable event.  It’s best to talk to your financial planner and tax professional.  The financial planner will help evaluate the potential tax savings over the decades and the tax professional will help evaluate the cost this year.

Possible Good News

The most recent proposed legislation does not eliminate the 37% tax bracket with an early reappearance of the 39.6% bracket, nor does it compress the 35% bracket into a short level-off before climbing to cruise altitude at the highest bracket.

Even better for the Real Estate tribe, the prohibitions on private equity and other “accredited investor” investments in qualified plans seems to be on the cutting room floor.

Increased Contribution Limits

As expected, inflation has driven a significant increase to TSP / 401(k) and other employer plan limits.  Under age 50, you can contribute $20,500 as the employee, and the employer can contribute the rest up to the limit of $61,000, up from $58,000 in 2021.  The catch-up contribution limit of $6,500 for those over 50 is unchanged.

IRA contribution limits, $6,000 under age 50 and $7,000 over 50 did not change, but inflation will take the Roth IRA cutoff for a married couple to $214K.  This might help a few extra folks escape the Backdoor Roth IRA sadness.

These limits are nifty, but studies show that only about 8% of those who even contribute to their TSP/401(k) actually contribute the maximum.  The number is closer to 5% for IRA contributors.  Thus, bumping these upper contribution limits is yet another ultra-first world problem, but aversion to taxation takes up quite a few chromosome pairs for most Americans.  On the balance, it’s probably best to worry about the “investment dog” and not the wagging “tax tail”.

Cleared to Rejoin

It’s November and most of us want to think about tryptophan comas on Thanksgiving, avoiding a trampling death on Black Friday, and shopping for that special someone in the mirror on Cyber Monday.  But the real calendar says it’s the crucial end of the first year of a new presidential administration.  Such years usually have big tax law changes and leave investors little time to act.  Every year has a brief Open Season to optimize use of employer health benefits.  This year has both, so savvy investors should stay tuned, finalize plans, and act if necessary before the windows close.

Fight’s On!

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