What You Need to Know
- Two bills to keep an eye on are the Build Back Better Act and Secure 2.0.
- Secure 2.0 has bipartisan support and is more likely to be enacted.
- As always, check and update beneficiary forms for all retirement plans. Make this a priority for all clients.
IRA legislation will not happen in 2021, and the IRA parts of the Build Back Better Act (BBB) may not happen in 2022 if the legislation remains stalled in Congress. But other retirement-related bills may have a better chance of becoming law.
So advisors should still share retirement tax planning strategies with clients in 2022, based on the current tax structure and what might be in the works.
Hit the ground running in early 2022 by addressing essential retirement tax planning moves with clients and contacts. These conversations add to your value beyond your core asset management functions. They will also calm client fears about what any potential new tax legislation might mean to them.
The news is filled with tax information that worries clients. They need to hear from you now. They want to know what’s true and what isn’t, and how any of these items will specifically affect them and their family. This builds client confidence and creates new business as more clients are talking about conversations you are having with them.
What Your Peers Are Reading
Use this list below to identify clients, their beneficiaries (your successor clients), and prospects, who might be affected by these items. Connect with centers of influence such as CPAs and estate attorneys who might need to be in the loop.
In other words, go the extra mile to provide added value that clients will notice and remember. That always leads to new business. Even small things can create big business.
For example, we just heard from an advisor in Pittsburgh who trains with us who brought in a $2 million IRA in December simply because he took the time to review required minimum distributions a client was worried about.
The client was trying to help her aunt, who has dementia, figure out her 2021 RMD to make sure it got done before the year ended. The other (now former) advisor told her, “You can call the 800 number and they can take care of it.”
He then told us in an email after hearing that: “My client came to me yesterday in a panic. We took care of the RMD for her aunt. Our client is now transferring her aunt’s $2M+ retirement accounts to our firm.”
This tells you that clients see high value in helping them even with what may seem like simple, easy things to most advisors. But these things keep clients up at night.
This is how advisors build long-lasting and profitable relationships and referrals. This is going the extra mile.
Think about how you can carry out this strategy in 2022. Here are some ideas.
First, About Those 2022 RMDs …
Identify clients who will have RMDs due in 2022. This includes non-spouse beneficiaries who may still qualify for the stretch IRA (if they inherited before 2020) or who may be subject to the 10-year rule (if they inherited in 2020 or later).
Under the 10-year rule, no RMDs are required until the end of the 10-year term, but you might want some beneficiaries to begin taking them earlier in order to get some of those funds out at lower marginal tax rates in 2022 and later years.
2022 RMDs, in general, will be larger since the Dec. 31, 2021, balances they will be based on will likely reflect the impressive 2021 stock market gains. Make sure they plan for the taxes due on their 2022 RMDs.
You might consider connecting with their CPAs or other tax advisors at tax time 2022 about this.
The Two Big Bills to Watch
Two bills to keep an eye on are the Build Back Better Act (BBB) and the Securing a Strong Retirement Act, known as Secure 2.0 (which many have forgotten about, but this one has bipartisan support and is more likely to be enacted).
Build Back Better Act
The BBB Act, which seems to be hanging by a thread, includes IRA provisions that will likely pass if the overall bill is enacted. That’s because these are not controversial compared with the bigger spending items that are causing the current gridlock.
Ban on Backdoor Roths
If BBB is enacted, the one provision that might be effective in 2022 is the ban on backdoor Roths, regardless of income, even though most who take advantage of these are higher-income clients because they make too much to qualify for a direct Roth IRA contribution.
The backdoor Roth is a workaround to the Roth IRA contribution limits: The client first contributes to a nondeductible traditional IRA (where there is no income limit) and then converts those funds to a Roth IRA.
Also banned would be so-called mega backdoor Roths, for those in company retirement plans who can contribute after-tax funds to the plan and then convert them essentially tax-free to their Roth IRAs. For 2022, that can be for up to $61,000. If you have clients who do these each year, have them hold off in 2022 until we know if they will be allowed.
BBB Retirement-Related Provisions: Effective in Later Years
Ban on Roth Conversions for Higher-Income Taxpayers
All other Roth conversions (of regular pretax retirement funds) would be banned for those with annual income in excess of $400,000 (individual), $450,000 (married-joint) and $425,000 (head-of-household). But this provision would not be effective until 2032 (10 years from now).
Even though this is 10 years out, let clients know now. They might want to begin a series of annual Roth conversions to use up the lower brackets now, with the goal of maximizing their Roth, just in case they are banned from doing so after 2031.
If anything, with this provision Congress will have encouraged the very activity (Roth conversions) they have set out to rein in. By providing a 10-year window, they will just be accelerating the Roth conversions they say they want to end.
Why would they do this? Money.