Monthly Archives: November 2024

The Constitution or Delayed RMDs?

The Constitution or delayed RMDs?

Incredibly, Donald Trump has signed up to make that choice, starting January 20th.

How can that be? It relates to SECURE 2.0. SECURE 2.0 made dozens of additions to the already complicated retirement account rules. Many like its delaying retirement account required minimum distributions (“RMDs”) for many Americans from age 72 to age 73 (and eventually to age 75). 

But there is a big time issue few have commented on. 

It has to do with the Omnibus Bill’s purported passage in December 2022. If the Omnibus, which contained SECURE 2.0, was not passed in a Constitutionally qualified manner, any Administration enforcing it would be acting counter to the Constitution and contrary to the rule of law. 

The Constitutional Problem with SECURE 2.0

A federal judge, in a very well written and reasoned opinion, determined that the 2022 Omnibus Bill, was passed by the House of Representatives at a time the House did not have a required quorum to enact legislation. In Texas v. Garland (accessible here and here), Judge James W. Hendrix ruled for the State of Texas that the House of Representatives impermissibly used proxies to establish a quorum. The House did not have a majority of members physically present, and thus did not have a sufficient quorum to enact legislation at the time of Omnibus’s purported passage. 

The quorum rule isn’t contained in the back of a House of Representatives parliamentary procedure manual. Rather, it is contained in the Quorum Clause of the United States Constitution, making it the highest level of legal authority. 

This ruling has broad implications for SECURE 2.0. If the Omnibus was not enacted in a Constitutionally qualified manner, SECURE 2.0 is not the law of the land. Any Administration enforcing it would be enforcing a law that is simply not the law of the land.

I encourage the reader to read the Texas v. Garland opinion. I find it convincing, but you get to be the judge and jury in your own mind. 

Assuming the new Administration agrees with Judge Hendrix’s reasoning, they should announce they will not enforce SECURE 2.0 in order to avoid acting contrary to the law.

Proposed Action

I recommend that shortly after President Trump’s inauguration the IRS and Treasury issue a Notice announcing the following:

  • In order to uphold the Constitution and the rule of law, the IRS and Treasury will not enforce SECURE 2.0.
  • Considering the equities involved, the uniqueness of taxpayers having acted under an announced law that was not, in fact, the law, and the limited enforcement resources available, the IRS will not challenge any acts made, plan/account qualification, and tax return positions taken based on SECURE 2.0 prior to the issuance of the Notice. Plans and financial institutions will be allowed a reasonable amount of time to adequately account for the Notice.
  • In order to eliminate harm from detrimental reliance on SECURE 2.0, appropriate equitable remedies will be applied to prior acts taken under SECURE 2.0 with relevance going forward. For example, any Roth SEP IRAs and Roth SIMPLE IRAs properly created and funded under SECURE 2.0 will be deemed to be Roth IRAs with respect to which valid contributions were previously made.
  • The IRS and Treasury will exercise their authority under Sections 402(c)(3)(B) and 408(d)(3)(I) and waive the 60-day requirement with respect to rollovers for any SECURE 2.0 qualified distributions followed by three year repayments so long as the distribution occurred prior to the issuance of the Notice and repayment is made back to the retirement account no later than December 31, 2025. 
  • The IRS will not require RMDs and not enforce the failure to withdraw penalty for those who turned age 73 in 2023 and for those who turned age 73 in 2024.
  • The IRS will require RMDs and enforce the failure to withdraw penalty for those who turn age 73 starting in 2025. 
  • Relevant 2025 limits will be applied not factoring in provisions from SECURE 2.0. Thus, guidance such as Notice 2024-80 is modified accordingly. For example, the 2025 qualified charitable distribution limit is $100,000 and for those age 60-63 the catch-up contribution limit is $7,500.

I recommend the new Administration issue that notice shortly after Inauguration Day to uphold the Constitution regardless of whether the new Congress chooses to take additional action with respect to SECURE 2.0.

The question then becomes what to do in Congress, if anything, with respect to SECURE 2.0. Since it is likely Congress will enact significant tax legislation, there will be one or more opportunities to address the issue.

I propose that as part of the 2025 tax changes Congress passes, Congress include a provision repealing SECURE 2.0 for the avoidance of doubt. That will end any possible litigation around SECURE 2.0, since the IRS will have waived any challenges resulting from acts occurring prior to the Trump Administration, and Congress will have repealed it (in case it is the law, counter to my opinion) going forward. 

SECURE 2.0 had more to do with 401(k) plan administrators and lawyers securing full employment than securing retirement for working Americans. SECURE 2.0 being pushed to the side would be no tragedy. Perhaps Congress should salvage a few good provisions, but most of it should be left on the scrap heap while Congress focuses on more important tax reforms and extending Tax Cuts and Jobs Act individual tax cuts.

I am more ambivalent about the delays in RMDs. Congress could simply enact SECURE 2.0’s RMD delays as part of its 2025 tax reforms. That said, I believe that tax cuts such as eliminating the taxes on tips and overtime are much better tax policy and should be prioritized. 

Further, the tax benefit of eliminating the tax on Social Security potentially dwarfs the tax benefit of a one or three year delay in RMDs. There’s a very valid argument that eliminating taxes on Social Security and having RMDs start at age 72 is appropriate and will leave many seniors in a vastly improved tax position when compared to where they stood prior to 2025. 

Conclusion

I would pick the Constitution over delayed RMDs any day of the week. The Constitution is far more important than any retirement account tax rule. While it is not good to say dozens of rules that Americans have planned around are invalid, it is far worse to disregard the Constitution. 

My hope is that the new Administration’s tax policy staff, including the new Assistant Secretary for Tax Policy, work to uphold the Constitution.

The new Administration, consistent with Judge Hendrix’s ruling, should acknowledge the Constitutional problem with SECURE 2.0 and addresses it head on. Doing so will demonstrate President Trump’s commitment to honor the Constitution and the rule of law. 

Follow me on X at @SeanMoneyandTax

This post is for educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, investment, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Note that a version of this proposal has been posted to the crowd sourced policy website PoliciesforPeople.com. The views reflected in this post are only those of the author, Sean Mullaney, and are not the views of anyone else.

2025 Solo 401(k) Update

Before we explore new developments for 2025, 2024 was so chock full of Solo 401(k) developments that it deserves its own rundown. Then we will move onto 2025 Solo 401(k) changes. 

Vanguard Out!

Vanguard transferred all of their Solo 401(k) accounts to Ascensus in 2024. Vanguard is now entirely out of the Solo 401(k) business.

The good news for those fond of Vanguard is that the Ascensus Solo 401(k) offers Vanguard mutual funds. 

The transition was not entirely smooth. Notably, beneficiary designation forms did not transfer from Vanguard to Ascensus. The Ascensus Solo 401(k) contribution portal is quite different from Vanguard’s and is not intuitive, in my opinion. I did a YouTube video about making contributions to a Solo 401(k) at Ascensus. 

I’m not in the business of making generic recommendations about which Solo 401(k) plan provider to use. In my book, I advocate strongly for considering a pre-approved plan (sometimes referred to as a prototype plan). Schwab, Fidelity, and Ascensus are now among the larger providers of pre-approved plans. While I will not provide any plan provider recommendation, I believe Ascensus, Fidelity, and Schwab are all reasonable options to consider.

Solo 401(k)s at Retirement

During 2024 I did a deep-dive on some Solo 401(k) history. The results of that research is a 27 page self-published article concluding that for Schedule C solopreneurs, a Solo 401(k) should survive the solopreneur’s retirement. 

One of the implications of that finding is that Solo 401(k)s should qualify for the Rule of 55. However, one must always consult with their own individual plan, as the plan itself must have rules facilitating Rule of 55 distributions. 

Doubts About SECURE 2.0

SECURE 2.0 made dozens of changes to retirement account rules. It made what I believe to be rather inconsequential changes to Solo 401(k) planning. Nevertheless, it did change some Solo 401(k) rules.

Based on a court case in federal district court in Texas, the legal foundation of SECURE 2.0 is now shaky. I discussed the situation on YouTube. It will be very interesting to see what the new Administration does with SECURE 2.0 considering that a federal district court judge made a very convincing argument that the passage of the Omnibus bill (which included SECURE 2.0) in December 2022 was not valid. 

New Solo 401(k) Employee Contributions Limit for 2025

The IRS announced that for 2025, the employee deferral limit for all 401(k)s, including Solo 401(k)s, will be $23,500. 

Solo 401(k) Catch-Up Contributions Limit for 2025

The IRS also announced that for 2025, the normal employee deferrals catch-up contribution limit remains $7,500. As a result, those aged 50 or older can contribute, in employee contributions, a maximum of the lesser of $31,000 ($23,500 plus $7,500) or earned income. 

New Solo 401(k) All Additions Limit for 2025

The new all-additions limit for Solo 401(k)s is $70,000 (or earned income, whichever is less). For those aged 50 or older during 2025, the $70,000 number is $77,500 ($70,000 plus $7,500). 

New Additional Catch-Up Contributions for Those Aged 60 Through 63

SECURE 2.0 increased the catch-up contribution for those aged 60 through 63 (see page 2087 of this file). In 2025, the catch-up contribution for these people is $11,250, not $7,500. As this is a SECURE 2.0 rule, I believe that Solo 401(k) users should (1) proceed with caution and (2) stay tuned. 

Traditional Solo 401(k) Contributions More Attractive Than Ever

I believe traditional Solo 401(k) contributions are now more attractive than ever. Why? The change in tax policy coming with the 2024 Election results.

There’s been plenty of debate: traditional versus Roth. The way to resolve that is to compare today’s marginal tax rate with the tax rate on the income in retirement. Today’s rate is pretty knowable, but tomorrow’s rate isn’t. 

That said, we do know that America has a history of standard deductions and graduated progressive tax rates. That, combined with Congress’s political incentives (retirees tend to vote), suggests that retirees will be relatively low taxed in retirement. 

Social Security has been a fly in the ointment to that view. Up to 85 percent of Social Security income fills up the standard deduction and lower tax brackets with income. Doesn’t that mean that traditional retirement account withdrawals will be taxed against higher tax brackets?

Starting in 2025, that issue may go away. Eliminating income tax on Social Security was a major promise of the Trump campaign. Considering the GOP majorities in both houses of Congress, the tax on Social Security should be repealed. Stay tuned! 

Removing Social Security from taxable income means significant amounts of traditional retirement account withdrawals should be tax free (offset by the standard deduction) or subject to the lower 10 percent and 12 income tax brackets. The possibility of even lighter taxation on traditional retirement account withdrawals makes traditional Solo 401(k) contributions more attractive than ever. 

2025 Update to Solo 401(k): The Solopreneur’s Retirement Account

Solo 401(k): The Solopreneur’s Retirement Account explores the nooks and crannies of Solo 401(k)s. On page 16 of the paperback edition, I provide an example of the Solo 401(k) limits for 2022 if a solopreneur makes $100,000 of Schedule C income. Here is a revised version (in italics) of the example (with the footnote omitted) applying the new 2025 employee contribution limit:

Lionel, age 35, is self-employed. His self-employment income (as reported on the Schedule C he files with his tax return) is $100,000. Lionel works with a financial institution to establish his own Solo 401(k) plan and choose investments for the plan. Lionel can contribute $23,500 to his Solo 401(k) as an employee deferral (2025 limit) and can choose to contribute, as an employer contribution, anywhere from 0-20% of his self-employment income.

Lionel’s maximum potential tax-advantaged Solo 401(k) contribution for 2025 is $42,087! That is a $23,500 employee contribution and a $18,587 employer contribution. Note there’s no change in the computation of the employer contribution for 2025 in this example. 

On page 18 I provide an example of the Solo 401(k) contribution limits factoring in catch-up contributions. Here’s the example revised for 2025:

If Lionel turned 50 during the year, his limits are as follows:

  • Employee contribution: lesser of self-employment income ($92,935) or $31,000: $31,000
  • Employer contribution: 20% of net self-employment income (20% X $92,935): $18,587
  • Overall contribution limit: lesser of net self-employment income ($92,935) or $77,500: $77,500

Amazon Reviews

If you have read Solo 401(k): The Solopreneur’s Retirement Account, you can help more solopreneurs find the book! How? By writing an honest, objective review of the book on Amazon.com. Reviews help other readers find the book!

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on X at @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, investment, and tax matters. Please also refer to the Disclaimer & Warning section found here.

2024 Year-End Tax Planning

It’s that time of year again. The air is cool and the Election is in the rear-view mirror. That can only mean one thing when it comes to personal finance: time to start thinking about year-end tax planning.

I’ll provide some commentary about year-end tax planning to consider, with headings corresponding to the timeframe required to execute. 

As always, none of this is advice for your particular situation but rather it is educational information. 

Urgent

By urgent, I mean those items that (i) need to happen before year-end and (ii) may not happen if taxpayers delay and try to accomplish them late in the year. 

Donor Advised Fund Contributions

The donor advised fund is a great way to contribute to charity and accelerate a tax deduction. My favorite way to use the donor advised fund is to contribute appreciated stock directly to the donor advised fund. This gets the donor three tax benefits: 1) a potential upfront itemized tax deduction, 2) removing the unrealized capital gain from future income tax, and 3) removing the income produced by the assets inside the donor advised fund from the donor’s tax return. 

In order to get the first benefit in 2024, the appreciated stock must be received by the donor advised fund prior to January 1, 2025. This deadline is no different than the normal charitable contribution deadline.

However, due to much year end interest in donor advised fund contributions and processing time, different financial institutions will have different deadlines on when transfers must be initiated in order to count for 2024. Donor advised fund planning should be attended to sooner rather than later. 

Taxable Roth Conversions

For a Roth conversion to count as being for 2024, it must be done before January 1, 2025. That means New Year’s Eve is the deadline. However, taxable Roth conversions should be done well before New Year’s Eve because 

  1. It requires analysis to determine if a taxable Roth conversion is advantageous, 
  2. If advantageous, the proper amount to convert must be estimated, and 
  3. The financial institution needs time to execute the Roth conversion so it counts as having occurred in 2024. 

Remember, generally speaking it is not good to have federal and/or state income taxes withheld when doing Roth conversions!

Gotta Happen Before 2026!!!

Before the Election, many commentators said “you’ve gotta get your Roth conversions done before tax rates go up in 2026!” If this were X (the artist formerly known as Twitter), the assertion would likely be accompanied by a hair-on-fire GIF. 😉

I have disagreed with the assertion. As I have stated before, there’s nothing more permanent than a temporary tax cut! Now with a second Trump presidency and a Republican Congress, it is likely that the higher standard deduction and rate cuts of the Tax Cuts and Jobs Act will be extended. 

Regardless of the particulars of 2025 tax changes, I recommend that you make your own personal taxable Roth conversion decisions based on your own personal situation and analysis of the landscape and not a fear of future tax hikes.

Adjust Withholding

This varies, but it is a good idea to look at how much tax you owed last year. If you are on pace to get 100% (110% if 2023 AGI is $150K or greater) or slightly more of that amount paid into Uncle Sam by the end of the year (take a look at your most recent pay stub), there’s likely no need for action. But what if you are likely to have much more or much less than 100%/110%? It may be that you want to reduce or increase your workplace withholdings for the rest of 2024. If you do, don’t forget to reassess your workplace withholdings for 2024 early in the year.

One great way to make up for underwithholding is through an IRA withdrawal mostly directed to the IRS and/or a state taxing agency. Just note that for those under age 59 ½, this tactic may require special planning.  

Backdoor Roth IRA Diligence

The deadline for the Backdoor Roth IRA for 2024 is not December 31st, as I will discuss below. But if you have already completed a Backdoor Roth IRA for 2023, the deadline to get to a zero balance in all traditional IRAs, SEP IRAs, and SIMPLE IRAs is December 31, 2024. 

Solo 401(k) Planning

There’s plenty of planning that needs to be done for solopreneurs in terms of retirement account contributions. 

The Solo 401(k) can get complicated. That’s why I wrote a book about them and post an annual update on Solo 401(k)s here on the blog. 

Year-End Deadline

These items can wait till close to year-end, though you don’t want to find yourself doing them on New Year’s Eve.

Tax Gain Harvesting

For those finding themselves in the 12% or lower federal marginal income tax bracket and with an asset in a taxable account with a built-in gain, tax gain harvesting prior to December 31, 2024 may be a good tax tactic to increase basis without incurring additional federal income tax. Remember, though, the gain itself increases one’s taxable income, making it harder to stay within the 12% or lower marginal income tax bracket. 

I’m also quite fond of tax gain harvesting that reallocates one’s portfolio in a tax efficient manner. 

Tax Loss Harvesting

The deadline for tax loss harvesting for 2024 is December 31, 2024. Just remember to navigate the wash sale rule. 

RMDs from Your Own Retirement Account

The deadline to take any required minimum distributions from one’s own retirement account is December 31, 2024. Remember, the rules can get a bit confusing. Generally, IRAs can be aggregated for RMD purposes, but 401(k)s cannot. 

RMDs from Inherited Accounts

The deadline to take any RMDs from inherited retirement accounts is December 31st. For some beneficiaries of retirement accounts inherited during 2020, 2021, 2022, and 2023, the IRS has waived 2024 RMDs. That said, all beneficiaries of inherited retirement accounts may want to consider affirmatively taking distributions (in addition to RMDs, if any) before the end of 2024 to put the income into a lower tax year, if 2024 happens to be a lower taxable income year vis-a-vis future tax years. 

Can Wait Till Next Year

Traditional IRA and Roth IRA Contribution Deadline

The deadline for funding either or both a traditional IRA and a Roth IRA for 2024 is April 15, 2025. 

Backdoor Roth IRA Deadline

There’s no law saying “the deadline for the Backdoor Roth IRA is DATE X.” However, the deadline to make a nondeductible traditional IRA contribution for the 2024 tax year is April 15, 2025. Those doing the Backdoor Roth IRA for 2024 and doing the Roth conversion step in 2025 may want to consider the unique tax filing when that happens (what I refer to as a “Split-Year Backdoor Roth IRA”). 

HSA Funding Deadline

The deadline to fund an HSA for 2024 is April 15, 2025. Those who have not maximized their HSA through payroll deductions during the year may want to look into establishing payroll withholding for their HSA so as to take advantage of the payroll tax break available when HSAs are funded through payroll. 

The deadline for those age 55 and older to fund a Baby HSA for 2024 is April 15, 2025. 

2025 Tax Planning at the End of 2024

HDHP and HSA Open Enrollment

It’s open enrollment season. Now is a great time to assess whether a high deductible health plan (a HDHP) is a good medical insurance plan for you. One of the benefits of the HDHP is the health savings account (an HSA).

For those who already have a HDHP, now is a good time to review payroll withholding into the HSA. Many HSA owners will want to max this out through payroll deductions so as to qualify to reduce both income taxes and payroll taxes.

Self-Employment Tax Planning

Year-end is a great time for solopreneurs, particularly newer solopreneurs, to assess their business structure and retirement plans. Perhaps 2024 is the year to open a Solo 401(k). Often this type of analysis benefits from professional consultations.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter at @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, investment, and tax matters. Please also refer to the Disclaimer & Warning section found here.