As you have probably heard, late last night the House of Representatives approved the legislation passed by the Senate on New Year’s Eve encompassing a deal to avoid the expiration of the Bush tax cuts for 98% of American taxpayers. That's the good news. But this show in DC is far from over.
The package that was agreed to contains nothing on the debt limit, and only postpones the sequester for two months. Coincidentally, Treasury officials say that they will be able to avoid exceeding the debt limit using extraordinary measures for two months. So they will be back at it in February, with the accompanying volatility in the market returning. Happy New Year!
As for what they did agree to, for 401(k) advisors, here are some important points you need to know:
• The package does not include any cuts or limitations on the current tax incentives for retirement savings.
• The marginal tax rate for married households for incomes above $450,000 increases to 39.6% beginning in 2013. (The capital gains and dividends rates increase to 20% for this income level as well.) However, the tax increase is understated due to the effect of the reinstatement of the so-called “PEP” and “Pease” provisions that phase out the personal exemptions and reduce itemized deductions for married households with incomes in excess of $300,000. The bottom line is that higher tax rates make the tax incentives for retirement savings more valuable. This will certainly be the case for clients with incomes above these thresholds.
• The package includes a provision, used to pay for the two-month suspension of the sequester, that allows for in-plan Roth conversions of amounts otherwise not distributable without any income limitations. This is obviously not as attractive for higher-income individuals given the new higher tax rates, but it may very well be worth discussing with certain clients.
• The package includes an extension of the provision allowing tax-free rollovers from IRAs for the purpose of making charitable contributions, subject to a $100,000 annual limit. Furthermore, a special provision was included allowing such contributions made in January 2013 to be treated as made in 2012.
Graff is the CEO and Executive Director of NAPA and ASPPA.
