Everyone has been on the edge of their seats.
And, after months of anticipation with a “two-track” process of infrastructure and separate tax legislation, it has happened: The American Families Plan is here. And few people saw what was coming.
Democrats on the House Ways and Means Committee defied expectations!
On September 13, 2021, they released their tax proposals. The legislation touches on a wide range of tax issues:
Over the next few weeks, I’ll be discussing the impact of this legislation on a variety of issues.
We’ll be looking at it all with an eye towards what’s most likely to pass. That way, you can consult and anticipate what you might do a) before year end, and b) over the next few years.
Right now, let’s look at what did happen and what could be happening.
Some of the rumored measures didn’t appear.
There are no measures related to equalizing the top ordinary income and capital gains rates. Nor is there anything related to eliminating the step-up in basis.
We could be losing several retirement plan strategies for high-income individuals.
The compression of tax brackets and increased tax rates are a big deal. But the most highly notable and widely effective piece would be the end of several retirement plan strategies.
Most remarkable among these relates to backdoor Roth IRAs and mega backdoor Roth IRA conversions. If enacted, Section 138311 of the proposal would prohibit conversions of after-tax dollars held in retirement accounts.
Limiting conversion of after-tax retirement plan contributions to Roth dollars began during the Obama administration.
Legislation proposed these conversions be banned. It also proposed adding required minimum distributions (RMDs) to Roth accounts. It proposed eliminating stretch IRA’s, which extend tax-deferred IRA benefits inherited by a non-spouse beneficiary. And, there was a proposal for preventing contributions to retirement accounts with balances over $3.4 million.
The Stretch IRA was eliminated in the 2019 SECURE Act.
Instead of the original lifetime schedule, beneficiaries must now complete distributions over a 10-year period. With that historical result in mind, it seems like the backdoor Roth is certainly on the chopping block by the end of 2021.
The remaining proposals provide some indication of what else could be on the chopping block, given the large ticket Infrastructure Bill going through Congress that requires a “revenue offset” to cover its cost.
If enacted, we need to take a fresh look at the convert-or-not decision for savers with after-tax dollars in retirement accounts.
The provision is not in its final form, but it looks like it’s going to be enacted. Many investors, particularly IRA owners, have been waiting for the optimal time to make a conversion. But the choice may soon be now or never, at least with respect to the after-tax dollars in their account.
And section 138311 goes beyond simply banning the conversion of after-tax amounts.
For high-income taxpayers with Adjusted Taxable Income in excess of an applicable threshold, the measure would prohibit Roth conversions altogether.
But this won’t happen right away. If it goes into effect, you may have until 2032 for this decision.
Nuances and obstacles abound.
We’re going to have a lot of strategic examination coming in the very near future. Stay tuned for more analysis of the new regulations and what they’ll mean for your retirement wealth planning.
If you’d like to know more about how to navigate the coming changes with an updated wealth planning strategy, feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question.
“How does a financial advisor work?” It’s such a simple question with no simple answer.
That’s because throughout the industry, advisor compensation varies.
And without knowing a financial advisor’s compensation model, it’s impossible to know how they benefit you and whether you want to work with them.
Some compensation models can have an impact on your overall return. Some advisors are “fee-only.” Some advisors are “fee-based.”
And what kinds of fees are there? They cover an entire range. There are:
For this relationship to work, you have to be comfortable and clear. Trusting your advisor is key. Your advisor helps you make critical financial decisions impacting important areas of your life. For this reason, it’s important that you feel fully comfortable with the cost of your advisor’s services, and be clear about how you are being charged.
Does your advisor earn commissions? What about a sales load when certain products are purchased? Are there trails in the mutual funds you are invested in?
What are the internal expenses of the funds you hold?
What if your advisor not commissioned, but fee-only? This changes the questions about the relationship. I’m a fee-only financial advisor, so I don’t receive compensation by recommending certain investments over others.
I’m also not associated with any broker dealer or firms that offer proprietary funds.
Nor do I accept commissions or compensation from sales loads.
It’s also important to note that I’m considered “independent.” That means I’m not required to sell the products of a particular firm or those favored by an employer.
This makes me a fiduciary, which comes with certain responsibilities. As you probably know, a fiduciary is someone who manages assets on behalf of another person with good faith and trust.
It requires abiding by a fiduciary duty, which is an ethical obligation to act solely in the best interest of the client.
Is there any downside to working with a fee-only financial advisor?
One downside is that we don’t sell insurance products, which are typically commission-based.
That said, I firmly believe insurance is part of a comprehensive plan. That’s why I maintain relationships with a handful of insurance firms that work exclusively with fee-only advisors. They recommend suitable insurance products, provide you a quote, and ultimately write the policy.
It’s important to note that fee-only advisors like mw do not get compensated for engaging in this process.
At the end of the day, my incentive is to deliver advice that’s in your best interest. Period.
That’s how I make my living, and it’s what keeps my clients coming back.
If you’d like to know more about working with SJ Boyle Wealth Management, feel free to visit our website or ask us a question.
Sally J Boyle
Sally Boyle is committed to being high-net worthy. A certified financial planner, she believes the single most important part of any wealth planning process is her conversation with you.