Increased 401(k) Contribution Limits
Beginning in 2022, the IRS raised the annual contribution limit for certain workplace retirement plans (including 401k and 403b plans) to $20,500. If you are in the habit of maxing out your annual contribution, double-check with your H.R. department to ensure that you are making elective deferrals at the appropriate rate.
Form 1099s are coming out right now for retirement distributions, interest dividends, and capital gains. Last year, due to COVID-19 staffing issues and a plethora of tax-related stimulus measures, there were more adjustments to the first version than usual. This year, we suggest waiting a few weeks after the corrected 1099s are issued by Schwab or Fidelity to finalize your tax returns, in case there are similar revisions.
New IRS Life Expectancy Tables
There are new life expectancy tables for 2022 Required Minimum Distributions (RMDs). The Internal Revenue Service hasn’t made such a change in 20 years. The new tables incorporate a slightly higher average life expectancy, which lowers the RMD amount as a percent of the IRA account value.
On top of that, the Secure Act of 2019 raised the RMD age from 70 ½ to 72 (so people who had not yet reached age 70.5 by 2019 were able to defer their first RMD by an additional 18 months). Based on the new tables, a 72-year-old commencing an RMD in 2022 needs to withdraw approximately 3.7% of their IRA balance as of December 31, 2021.
Qualified Charitable Distributions (QCDs)
For our clients who are already taking RMDs, and giving to charity every year, making donations directly from your IRA can have valuable tax benefits, particularly if you’re claiming the standard deduction on your tax returns.
One problem with QCDs is that most people do them at the end of the year—when they’re in charitable-giving mode but, frequently, after their RMDs are satisfied. They really should be done before completing the total amount of their RMD. The sequence of distributions has important tax implications because the IRS requires that the first dollars to come out of an IRA each year first go toward satisfying the RMD.
For instance, if you have a $10,000 RMD and plan on giving to charity throughout the year an estimated total amount between $2,000 and $3,000, donate from your IRA before taking distributions. In this example, when December comes, add up all your donations for the year (e.g., $2,700), and take a distribution for the balance ($7,300). However, if you instead wait until the end of the year to do the QCDs, you might not be able to subsequently reduce the income you took as an RMD earlier in the year.
Hold off on backdoor Roth IRA Conversions
The “backdoor Roth” is a workaround to the Roth IRA contribution limits: you contribute to a nondeductible traditional IRA (with no income limit) and then convert those funds to a Roth IRA.
Although the “Build Back Better” bill did not pass in 2021, a provision in late drafts of the bill would have banned the backdoor Roth conversion beginning January 1, 2022. Whether the backdoor loophole is closed in 2022, we expect that its days are numbered as there appears to be a consensus among legislators that it is not in keeping with the original spirit of the legislation that created the Roth IRA in 1997.
Also contemplated was a ban on the so-called “mega backdoor Roth,” wherein one can contribute after-tax funds to a corporate retirement plan and convert them tax-free to a Roth account. For 2022, that can be for up to $61,000.
Because of the uncertainty about the ban and the complexities of undoing a conversion later, we recommend that clients who do these each year hold off until we know if they will be allowed in 2022.
As always, when alerting you to tax-related issues, we strongly recommend that you consult first with your trusted tax preparer. We are always available to discuss available strategies with them.
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