IRS Postpones Plan To Hurt Retirement Savers

For the second time in as many years, the Internal Revenue Service (IRS) has postponed a rule that would hurt upper income, highly paid 401K savers. This rule was part of the SECURE Act 2.0, signed into law by the New Administration back in December of 2022.

The postponement changes a couple of things. First, it delays the new reporting requirements where 401K plan administrators have to produce annual 1099-B’s until 2024. Second, it requires older, highly paid 401K plan contributors to make their contributions into Roth Accounts instead of 401K’s.

This change would effectively eliminate the tax deduction associated with 401K Contributions and negate the reason for the retirement plan in the first place. This issue caused such an uproar between contributors and their employers that the IRS put the whole thing on hold for yet another year.

Other changes that are being implemented by the SECURE Act 2.0 include…

1 – Automatic Enrollment

Beginning in 2025, Employers who began retirement plans after December 29, 2022 are required to enroll eligible employees into their plans. Exceptions to this rule include employers with less than 10 employees, church organizations, and government workers.

Take a moment and think about that. They’re going to force us to enroll new employees in expensive retirement plans, but their own government workers are somehow exempted? Don’t you just love this country? Democracy at its finest.

2 – Roth Account Matching

Existing Retirement Accounts can be amended to include employer matching to Roth type vehicles.

3 – Required Minimum Distributions

SECURE Act 2.0 made several changes to RMD’s that are way too complicated to write about. If I made the mistake of trying to explain them, you’d fall asleep by the second sentence.

Suffice it to say, that if you’re at a point in your retirement where RMD’s are required, please call your retirement planning specialist for an explanation.

4 – Qualified Charitable Contributions

At age 70 1/2, taxpayers can make charitable contributions of up to $100,000 from their IRA’s. This number will now be indexed for inflation.

5 – 529 Plans

Beginning next year, any unused 529 Plans can be converted to Roth Accounts.

Let me leave you with this.

The IRS action in postponing the 401K rules that would hurt high income contributors for the second time proves a point that many outside of taxation don’t understand. It’s the fact that just because Congress and the President sign a law into place, doesn’t mean that the IRS will enforce it.

In many ways, they’re an independent governmental agency that does whatever they want. In my short 33 year career, I’ve seen them do this more times than even I can count.

Let’s say that the House and Senate go through their usual shenanigans and pass a law that hurts a significant portion of the population or goes against a bunch of existing tax law. Let’s also say that the President signs it into law.

Reasonable minds would say that this is the law of the land that must be obeyed and adhered to. But in saying that, you’re forgetting the most important part of the equation.

The IRS.

In many ways this agency works with complete autonomy and impunity. Once the law comes to them, they might do what they did in this case by postponing enforcement and deciding not to decide.

They also have another process where they take time to “interpret” the law. Then they’ll send out a Revenue Procedure or change notice explaining how it will be enforced.

This process effectively changes the law however they want it to be changed.

The next time you say something like, “The IRS can’t do that,” think again.

We’re all going to get through this. Let’s get through it together.

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