Financial Planning in the New Year

As we raise our glasses to toast the New Year, we are also stepping outside the white noise of our busy lives to reflect on the year we just completed in order to make adjustments for a better tomorrow. Resolutions for the New Year of 2023 are ways to take more control of our lives and be better versions of ourselves. The New Year brings opportunity for a clean slate, a chance to reboot our behaviors and habits. The Bedell Frazier Financial Planning team has compiled a list of smart money moves or financial resolutions to kick off your New Year.

Contributions increase for employer retirement accounts in 2023, so you can save more. The personal savings rate in America dropped to 2.3% in October, the lowest measure since July of 2005. The Bureau of Economic Analysis defines the personal savings rate as how much of people’s income is left over after taxes and regular spending. One of the most powerful steps you can take for successful retirement planning is to be consistently contributing to your retirement accounts – the earlier you start the better! Inflation has caused the Internal Revenue Service to increase the amounts you can save in retirement accounts in 2023.

Traditional 401(k):

This is one of the most popular retirement savings vehicles that your for-profit employer sets up. It is a very convenient way to save for retirement with pre-tax dollars which lowers your taxable income for the year. Your company may have a company match to your contribution. For example, your company’s plan may match up to 3 percent of your salary or 50% percent match up to 8 percent of your salary. The company match is free money that is put toward retirement savings. A 401(k) is the first place you should allocate retirement savings dollars.

For 2023, the new inflation guidance from the IRS allows up to $22,500 in your 401(k), up from $20,500 in 2022. The 50 and over catch-up was also increased to $7,500, up an additional $1,000 from last year.

Roth 401(k):

Roth 401(k) accounts are after-tax dollars rather than pre-tax dollars. However, when you make withdrawals in retirement, they come out of the Roth tax-free rather than as ordinary income, which is the case with the traditional 401(k). A Roth 401(k) offers the combination of tax-free growth and tax-free withdrawals.

The contribution limits for a Roth 401(k) are the same as a traditional 401(k): $22,500, with the $7,500 catch-up for those aged 50 and above. These limits are for total 401(k) contributions in 2023. You can split between a traditional 401(k) and a Roth 401(k). If you contribute to your employer’s Roth 401(k), you are also eligible to receive the company match if they offer one. Prior to passage of the SECURE Act 2.0, the Roth match was placed in the traditional 401(k) pre-tax bucket, now the employer has the option of matching in the Roth 401(k).

403(b) and 457 plans:

The limits on 403(b) accounts, which are similar to 401(k)s for those who work at non-profit organizations, increased to that same limit of $22,500 with $7,500 catch-up for those over 50. The 403(b) may have an extra $3,000 contribution for those with the same organization for 15 or more years. 457 plans, which are for state and local government employees, have the $22,500 limit and are subject to unique catch-up contributions depending on the plan.

Action Items for All Workers

Now is the time to log into your employer retirement plan online to review your savings rate and ensure you are maximizing savings. You may need to increase your paycheck withholdings based on the 2023 increased limits. At a minimum, we recommend workers contribute at least enough to get the full company match. Increase as much as you can until you hit the contribution limit. This applies to workers of all ages. The sooner you start saving the better.

Contact the Bedell Frazier Financial Planning team if you would like assistance with your 401(k), 403(b) or 457 plans contributions or the asset allocation of your investment choices. We provide this service for you and your family members free as Bedell Frazier clients even though we may not manage those accounts.

Limits for Traditional and Roth IRAs

Individual Retirement Accounts (IRA) contribution limits for both traditional IRA and Roth IRA, increased to $6,500, a bump of $500 from the previous year. You must have earned income to contribute to an IRA and can’t contribute more than you earn. If you are a non-working spouse, you can contribute to a spousal IRA as long as your spouse earns enough to cover the contribution.

The 50 and over catch-up remains $1,000, unchanged since 2006. IRA contribution limits apply to your combined traditional and Roth IRA. If you don’t have a retirement plan through your employer like a 401(k), the contributions you make to a traditional IRA may be tax-deductible.

Phaseouts for deducting a traditional IRA in 2023 modified adjust gross income (MAGI):

  • Single and covered by a retirement plan, phaseout between $73,000 and $83,000.
  • Married filing jointly and covered by retirement plan, phase out $116,000 and $136,000.
  • Married filing jointly and spouse covered by retirement plan, phase out $218,000 and $228,000.

Phaseouts for contributing to Roth IRA in 2023 (MAGI):

  • Single and head of household, the phaseout is between $138,000 to $153,000.
  • Married filing jointly, the phaseout was bumped up by $14,000 to $218,000 to $228,000.
  • (You can make a partial Roth contribution if you are between the phaseout range, no contribution if your adjusted gross income is over the phaseout.)

Contribution increases for Self-Employed retirement accounts in 2023 and Roth:

  • SEP(Simplified Employee Pension) IRA increases from a maximum of $61,000 to $66,000 in 2023.
  • SIMPLE(Savings Incentive Match Plan for Employees) IRA jumps by $1,500 to $15,500 with 50 and over catch-up increase of $500 to $3,500 for a total maximum of $19,000.

With the passage of the SECURE 2.0 Act (section 601), you will be able to have Roth contributions in both SIMPLE and SEP IRAs in 2023.

Gifting Limits Increase in the New Year

The annual gift tax exclusion will increase by $1,000 in 2023 and will stand at $17,000 per person. Married couples can gift $34,000 per donee with gift splitting.

Special 529 College Savings Account Gifting

The 529 college savings plan is one of the most popular college savings plans and they offer a unique gifting opportunity. The 529 plan allows a donor to make up to 5 years of donations lumped into one year $85,000 ($17,000 x 5 years). This can be a useful estate planning tool as the money in the 529 plan is outside of the donor’s estate, but they are still in control of the assets. With few exceptions, the named beneficiary has no legal rights to the funds, unlike a UGMA/UTMA where the child takes control once they reach legal age. If you are a grandparent, the value of 529 plan assets will not show up on the child’s (beneficiary) FAFSA (Free Application for Federal Student Aid).

Here are the advantages of 529 for grandparents and non-parent relatives: You can help fund the child’s college education, the child can use up to $10,000 of the 529 account per year for elementary or secondary education(this is across all 529 plans in the child’s name), you keep control of the assets, and the value of the assets won’t impact their student aid on the FAFSA. Now with the passage of the SECURE Act 2.0 at the end of 2022, you can use any leftover funds in the 529 college savings account to start retirement savings by rolling them into a Roth IRA for the beneficiary.

A new law was recently passed regarding Roth IRAs and 529 plans. The beneficiary (child) of the 529 college savings account, which must have been opened for 15 years, must move the funds to a Roth IRA in their name. The annual contribution limits still apply, $6,500 in 2023, but the normal income limits on Roth IRA contributions do not impact this transfer. The lifetime rollover limit is $35,000 of unused 529 college funds to the Roth IRA. The reason for passing this new law was that families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary receives a scholarship to pay for their education, goes to a less expensive school, or chooses not to attend college. This is effective for distributions after December 31, 2023.

Reevaluate your Emergency Fund

The events since Covid hit have reinforced the importance of having a safe, liquid backstop in case you have disruptions to your income or encounter unexpected expenses. We all had friends or family impacted by job loss or lost income during the Covid shutdowns in the Spring of 2020. Recently we have seen layoffs here in the Bay Area in the tech industry and other businesses tick-up. How many of your current expenses can’t be cut if you or your significant other lose their job? You want to have at least three to six months of non-discretionary expenses set aside to be prepared for unforeseen circumstances. The key with this emergency backstop is you won’t have to put expenses on high-interest credit cards or pull money out of retirement accounts, which could be hit by early withdraw penalties and taxes.

Update Your Financial Plan with Bedell Frazier

The events of the past couple of years including the spike in interest rates, volatility in the investment markets, and a dramatic increase in the inflation rate, have caused many to reevaluate their retirement spending. What they once thought was a reasonable withdraw rate from their retirement portfolio is giving them pause. Now would be the time to take advantage of our complimentary financial planning as a Bedell Frazier client. If you already have a financial plan, contact us to update it.

The Bedell Frazier Financial Planning Team can account for all of these variables in our retirement planning process to give you peace of mind in these volatile times. We can also examine different inflation rates to see the impact on a client’s ability to fund their retirement goals, if that is something that is keeping you up at night. Once the financial plan is built out, it can be quickly updated to account for changes in your life. Your life is dynamic your financial plan should be too!

The Bedell Frazier Financial Planning Department wishes you a Happy, Healthy, and Prosperous New Year!

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