Month: April 2023

Preface: What the caterpillar calls the end of the world, the Master calls the butterfly – Richard Bach

SECURE Act 2.0: Encouraging Individuals to Save

The SECURE 2.0 Act of 2022 (SECURE Act 2.0) is designed to build upon the provisions of the original SECURE Act to increase participation and boost retirement savings. In part, the SECURE Act 2.0 does this by making important changes to retirement contribution and required minimum distribution rules to help individuals with plan selection and opportunities that encourage retirement savings.

Retirement Plan Participation

One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than three percent of salary, and no more than ten percent. The amount of employee contributions is increased by one percent every year after automatic enrollment, increasing to at least 10 percent but not more than 15 percent of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage.

In addition, the SECURE Act 2.0 reduces the length of service requirements for part-time employees to participate in sponsored plans from three years to two years. As women are more likely to work part-time than men, this provision is particularly important for women in the workforce. The SECURE Act provides that except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or 3 consecutive years of service where the employee completes at least 500 hours of service. The SECURE Act 2.0 reduces the three-year rule to 2 years, effective for plan years beginning after December 31, 2024.

Catch-Up Limits

The annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased (“catch-up contributions”). For 2023, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, and $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, and 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the catch-up contribution for participants not aged 60 through 63. Like the “standard” catch-up amount, these limitations are subject to inflation adjustment.

Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). For tax years beginning after December 31, 2023, the SECURE Act 2.0 provides that all catch-up contributions to qualified retirement plans are subject to Roth tax treatment.

The annual limit on contributions to individual retirement accounts (IRAs) is also increased for participants aged 50 and older. The “catch-up” limit for IRAs is currently $1,000. Unlike the catch-up amount for other plans, this amount is not subject to increases for inflation under current law. The SECURE Act 2.0 makes the IRA catch-up amount adjusted annually for inflation for tax years beginning after 2023.

Saver’s Credit

Lower-income individuals may be eligible for the retirement savings contribution credit (saver’s credit) for contributions and deferrals to certain retirement plans. The credit also applies to contributions to ABLE accounts for tax years beginning after December 22, 2017, and before January 1, 2026. Currently, the credit is equal to the taxpayer’s applicable percentage, based on filing status and adjusted gross income, multiplied by up to $2,000 in total qualified retirement savings contributions. The maximum credit is $1,000. For tax years beginning after 2026, the saver’s credit is simplified from its current three-tier structure based upon income amounts to a unified 50 percent credit amount, with a phaseout for higher incomes. After 2027, the phaseouts for income are adjusted for inflation.

Required Minimum Distributions

Under current law, as enacted as part of the original SECURE Act, plan participants are required to begin taking distributions (“required minimum distributions” or “RMDs”) at age 72. Under the SECURE Act 2.0, the age at which participants must begin taking distributions is increased over a period of ten years. Starting in 2023, the age is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033. For individuals who turn 74 after 2032, RMDs must begin at age 75. The SECURE Act 2.0 also reduces the penalty on failures to take a required minimum distribution from 50 percent to 25 percent. The 25 percent penalty is further reduced to 10 percent if corrective action is taken in a timely manner. The reduction is effective for tax years beginning after 2022.

Additional Provisions

The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings. These additional improvements include:

• • • • Eliminating an actuarial test in the regulations relating to required minimum distributions that limits the use of certain annuities in defined contribution plans and individual retirement accounts. The modification makes it possible for participants to make elections to use annuities that provide only a small financial benefit but important guarantees (calendar years after 2022)
      • Allowing SIMPLE IRAs to accept Roth contributions and granting the ability to treat employee and employer simplified employee pension contributions as Roth contributions (tax years after 2022)
      • Allowing employers to make matching contributions to employee plans for the employee’s student loan payments (plan years beginning after 2023)
      • Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (plan years beginning after 2022)
      • For tax years beginning after 2025, the required date for the onset of disability increases from age 26 to age 46 for designated beneficiaries of an ABLE account. Beneficiaries are allowed tax-free rollovers of 529 plan account balances to Roth individual retirement accounts starting in 2024.
      • A surviving spouse may elect to be treated as if the surviving spouse were the employee for purposes of determining the date for required minimum distributions.

The changes under provisions of the SECURE Act 2.0 may affect your retirement plan contribution and distribution options. Please call our office if you’d like more information.

Preface: If the Apostle Paul had received a loans of one penny from his father and it compounded at 2%, would he now owe more than the entire Roman Treasury resources or perhaps more than a trillion dollars in 2023?

Below Market Loans

A below-market loan is a loan on which the interest charged is less than the applicable federal rate (AFR). The excess of interest computed using the AFR over the interest actually charged is treated as being transferred by the borrower to the lender as interest and also as being transferred back from the lender to the borrower. The amount and the timing of these deemed transfers depend upon the type of the loan. Deemed transfers are treated for all tax purposes as if actually made.  

 The deemed transfer from the lender to the borrower is treated as a gift, compensation, dividend, or contribution to capital depending on the relationship between the borrower and the lender. The deemed interest is then treated as transferred back to the lender as interest. These deemed transactions, of course, may have an income tax effect through the creation of income and deductions, a gift tax effect through the creation of a taxable transfer, or an estate tax effect through the creation of a taxable gift that becomes an adjusted taxable gift.

These rules apply only to loans of money. They specifically apply to gift loans, compensation-related loans, corporation-shareholder loans, tax avoidance loans, certain loans to continuing care facilities, and other below-market loans if the interest arrangement has a significant effect on the federal tax liability of the borrower or the lender. The IRS has authority to exempt any class of transactions from these rules if there is no significant effect on any federal tax liability of the borrower or the lender as a result of the interest arrangements.

For below-market loans other than demand or gift loans, the lender is treated as transferring and the borrower is treated as receiving, on the date of the loan, an amount equal to the excess of the loan amount over the present value of all principal and interest payments under the loan. All amounts are included by the lender and deducted by the borrower under original issue discount (OID) principles.

 De minimis rules create exceptions for gift loans, compensation-related loans, and corporation-shareholder loans, if the aggregate amount of loans between the borrower and the lender does not exceed $10,000. In addition, in the case of a gift loan between individuals, the amount of the deemed transfers is limited to the net investment income of the borrower, if the aggregate amount of loans between the individuals does not exceed $100,000.

 If a loan is subject to the rules discussed above, special reporting requirements apply to both the borrower and the lender.

Preface: “People rarely succeed unless they have fun in what they are doing.” —Dale Carnegie

How to Address Burnout

In many respects, burnout is just a new term for mid-life crisis. But in some ways, it’s on a much bigger scale. Whereas you might buy a Corvette to quench a mid-life crisis, burnout can sap your energy to the point where nothing can motivate you. This, in turn, can have negative effects on business performance.

When you grow a successful business, you may feel the effects of burnout. Even worse, you may feel them before you’re in a position to retire on your terms. Worse still, by the time you’re in the throes of burnout, you may not have the energy to address it!

Today, we’ll present a process for addressing burnout within the context of planning for a successful future before it hits you.

1. Reduce job-related stressors
According to Harvard Business Review, a key element of addressing burnout is to reduce job-related stressors.

If you’re thinking to yourself, “Easier said than done,” you’re not wrong. For successful business owners, it may seem that job-related stressors are at the very core of running a successful business.

However, one strong strategy for reducing job-related stressors is to seek out and install next-level managers.

Next-level managers are people who have the skill and experience to take your business to the next level. In doing so, they take on some of your responsibilities, which can help reduce job-related stressors.

Additionally, having next-level management is a core element of planning for a successful future. As they take on more of your responsibilities, the business begins to rely less on you. When your business no longer relies on you for success, you have more pathways to leaving it on your terms.
This applies even if you never intend to leave your business, as next-level management can give you more freedom to do what you do best in your business.

2. Reassess and realign goals, skills, and work passions
As the business evolves, so too will your goals, skills, and passions.
For instance, you may have started your business with a goal of achieving financial security and retiring to Barbados by age 45. But then maybe you learned you loved the work itself, or met someone special and had kids, which inevitably changed your calculus.

Regardless of the details, things change. But when your plans don’t change with reality, it can make you feel like you’re spinning your tires in Mississippi mud.

Another core element of planning for a successful future is establishing goals along with strategies to help you achieve them. A huge benefit of planning with an Advisor Team is that as your goals and realities change, so too can your strategies.

When your planning evolves with you, it could reignite the fire you had when your first started the business, giving you more energy to pursue success on your terms.

Conclusion

One of the most difficult parts of addressing burnout is beginning the process before it hits. While it’s certainly possible to address burnout even when you’re in the middle of it—especially when using the strategies above—prevention is much easier to manage than finding the cure.

Fortunately, an inherent benefit of planning for a successful future is that such plans address many of the causes of burnout. From installing a next-level management team to assuring that your plans align with your goals (even as they evolve), planning for a successful future, with help from an Advisor Team, can help you keep burnout at bay.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

Don Feldman is the founder of Keystone Business Transitions, LLC, a Lancaster, PA firm devoted to helping business owners smoothly exit their companies. He has been a CPA for over 25 years and a valuation professional for 20 years. For the last 15 years, Don’s practice has focused on succession and exit planning, including transfers of business interests to family members and key employees, as well as sales to outside buyers.

Jesus said unto her, “I am the resurrection, and the life: he that believeth in me, though he were dead, yet shall he live: And whosoever liveth and believeth in me shall never die. Believest thou this?” John 11:25-26 KJV

Easter is a joyous time to celebrate the New Hope His resurrection brings and the new life and new beginnings all around us. All are precious gifts from above.

Sauder & Stoltzfus would like to take this opportunity to wish our valued clients and their families a Blessed Easter, filled with peace, love, and hope.

He is Risen! He is Risen, indeed!

Sauder & Stoltzfus, LLC

Preface: “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” – Charlie Munger

Selling Mutual Funds – Tax Choices in Figuring Gain or Loss

To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. But you have two options. You can choose to use either a cost basis or an average basis to figure your gain or loss.

Cost Basis

You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.

To figure cost basis, you can choose one of the following methods.
• Specific share identification.
• First-in first-out (FIFO).

Specific share identification. If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss.

You are presumed to adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:
Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred.

You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.

First-in first-out (FIFO). If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.

Average Basis  You can use the average basis method to determine the basis of shares of stock if the shares are identical to each other, you acquired them at different times and different prices and left them in an account with a custodian or agent, and either:.

They are shares in a mutual fund (or other regulated investment company);
They are shares you hold in connection with a dividend reinvestment plan (DRP), and all the shares you hold in connection with the dividend reinvestment plan are treated as covered securities (defined later); or you acquired them after 2011 in connection with a dividend reinvestment plan.

Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock. However, shares of stock in a dividend reinvestment plan are not identical to shares of stock with the same CUSIP number that are not in a dividend reinvestment plan. The basis of each share of identical stock in the account is the aggregate basis of all shares of that stock in the account divided by the aggregate number of shares.

Transition rule from double-category method. You may no longer use the double-category method for figuring your average basis. If you were using the double-category method for stock you acquired before April 1, 2011 and you sell, exchange or otherwise dispose of that stock on or after April 1, 2011, you must figure the average basis of this stock by averaging together all identical shares of stock in the account on April 1, 2011, regardless of the holding period.

Election of average basis method for covered securities. To make the election to use the average basis method for your covered securities, you must send written notice to the custodian or agent who keeps the account. The written notice can be made electronically. You must also notify your broker that you have made the election.

Generally, a covered security is a security you acquired after 2010, with certain exceptions.

You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. Your election must identify each account with that custodian or agent and each stock in that account to which the election applies. The election can also indicate that it applies to all accounts with a custodian or agent, including accounts you later establish with the custodian or agent.

Election of average basis method for non-covered securities. For noncovered securities, you elect to use the average basis method on your income tax return for the first tax year that the election applies. You make the election by showing on your return that you used the average basis method in reporting gain or loss on the sale or other disposition.

Revoking the average basis method election. You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging.

You may be able to find the average basis of your shares from information provided by the fund.

It is important to maintain your records as evidence of your basis for tax purposes. Please feel free to contact us if your have any questions about these rules or about any other tax rules regarding sales of investment property.