Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Is this 401(k) Tax Benefit Disappearing?

Follow Us
Facebook logotwitter logoLinkedin logo

Welcome back to another episode of The Retire One Show! Your hosts, Johnathan and Melissa Rankin discuss a big change that might be coming to 401(k) plans. Starting January 1st, there may be a new rule that removes a tax benefit for retirement savers over 50 years old. We're talking about catch-up contributions and some upcoming changes that may impact them. We also spend time discussing how much people need to have saved in order to retire comfortably and what it takes to become financially secure.

Have questions about your retirement? Email us at Retire@theoremwm.com or use the link below to schedule some time with a member of our team.

Hello and welcome back to another episode of The retire one show. I'm Johnathan Rankin, your host, I'm the founder and CEO of clear and wealth management. And I am joined finally back in the seat by my lovely co host. Hi, I'm Melissa Rankin. And it really wasn't that long. It was one episode you had to endure. It was it was a long, trust me it was a long episode I recorded the episode I you know, for those who watched it, I mean, it was 40 some odd minutes. He did that just to tell you all I'm so sorry, I can't believe he rambled on for 40 some odd minutes. Everybody enjoyed it, they loved it. Now they're gonna love it even more that you're back, because I love it that you're back. We got a great show for you. Today, we're gonna be talking about some big changes with 401, K's as well as really financial security in general. And then there's also the new amount that I guess everybody needs to retire off of. So we got a lot a lot to get to. But before we do that, before we do that, what do we got to do? We want to make sure that you are subscribed so that you never miss an episode, hopefully with both of us in it. But if not, you know you still don't want to miss an episode. Nope. Don't miss an episode. Also subscribe to our weekly retirement newsletter comes out on Fridays, and sometimes on Mondays, but usually Fridays, but also then sometimes on Monday. So depends on the week depends on the week, make sure you subscribe, it's gonna get to your inbox somehow. Just go ahead and use the link below. Subscribe. And with that, let's dig into some of the big changes coming to 401k plans. Yeah, let's get into it. So there is a popular 401k tax break that is going away. So now you want to break it down? Yes. So if you're over 50, you can make up catch up contributions in your 401k. This allows you to save an additional 7500 this year for a total of 30,000 into your 401k. However, starting next year, those ketchup contributions will be shifted into an after tax Roth account for people who earn more than 145,000. That's right. So this is this is pretty big, it's a pretty big change, especially for those who are utilizing that catch up contribution. So let's break down why this is happening. The impact to the savers and whether or not this is a good or a bad thing. So why are they doing this? Well, higher tax right now, because of your income. IRS wants to get their cut, I'm always let's just face it, if you are, you know making over 145,000, they probably look at it as a way where they can tax those dollars at a higher rate. Because if you remember a Roth IRA, or a Roth 401 K in this example, that $7,500 is going to be taxed, and then put into the Roth, whereas right now it's going into the traditional 401k. It's not taxed. So all $7,500 only gets taxed once you start withdrawing it later on in retirement. And the plan has always been for, you know, 30 plus years is that you save in a tax deferred account, while your incomes higher. So it reduces your taxable income, you get the tax break today. And then later on in retirement, you're going to be in a lower tax bracket, you withdraw those funds. And I think the IRS has caught on to this right. And now more to Yeah, they want you to pay taxes while you're in that higher tax bracket. So the impact to people though, now let's kind of go through that. So if you're in a 35% tax bracket, usually you would get about a $2,625 tax deduction for that $7,500 Catch up contribution. And then someone who's in a 22% tax bracket would be able to deduct $1,650. So it's just taking that and it's taxing it in that tax bracket. And that's going to be the kind of hard dollar impact that people are going to see. But you do need to keep in mind that the change is only applying to 401 K's, not IRAs, which actually does allow catchup contributions of an additional 1000. For people over 50. Yep, back to the 401k. Is it a bad thing? So I don't actually think this is a bad thing. I know that there's going to be, you know, some polarizing conversations about this, whether or not, you know, it's a bad thing that the IRS wants their money. Now, I think if you look at it through that lens, then yeah, it's nobody wants to pay more taxes, and especially if you're able to reduce your taxable income during this current year, it is a benefit that you're losing. However, you know, the other thing to think about is that people assume that they're going to be in a lower tax bracket in retirement. And that's just not always the case. And we usually see this, you know, high earners, if you're maxing out your 401 K, you're hitting that $30,000 a year, the likelihood that you have a large 401k balance is pretty high. And which that is going to then in turn mean larger required minimum distributions. When you turn, depending on your age, you're taking them now or 73 At some point, or 75. They're changing the whole thing, but depending on your age, at some point, your RMDs are going to be larger pushing you into a larger tax bracket. This always comes back to the question that we get from people. How can I do anything about taxes in retirement? And we've said for a long time Well, if you're about to retire, and the only thing you've been doing your entire career has been a traditional 401 K You have a large balance there, it's gonna be really tough for you to really manipulate that tax bracket in retirement. So this allows people now to it forces them into that Roth portion. And for you think about people who are in that highest tax bracket, they probably were phased out of a Roth IRA for the longest time. So this might be their first opportunity, if you will, yeah. So this gets them the ability to put money in there and forces that, and it forces that asset location diversification that we've talked about before, where you want to have different type of accounts based on their tax structure. So that way, when you're in retirement, and you're withdrawing funds, you have the ability to then you really be flexible with the taxes that you're paying. So I don't think this is a bad thing. It depends on your individual circumstances. But what I found in working with, you know, hundreds of people on retirement planning is that most people wish they had more money in a Roth IRA or a Roth 401 K. And I think this is going to help at least create both of those buckets. Because usually, we see the most successful people have a little bit in each bucket, maybe usually more than a traditional, but having some in Roth is definitely a positive, which I think just goes to show whether you think it's a good or bad thing to your personal situation, it might actually not be happening on time, the changes are set to go into effect January 1, however, plan providers company's payroll, I mean, payroll systems alone, they're not fully built to handle the logistics of trying to maneuver around this new. I mean, there's just no way. Yeah, it's funny, because I saw statistics that for fidelity, they've got something like I think it's almost close to 25,000, 401k clients, and 30% of those clients don't even have the Roth feature in them. So if this is going to be a rule that gets implemented based on a law, well, those companies 30% of 25,000, that's a lot of companies a number that are going to need to start implementing, or at least putting together that Roth component, which takes work. And so there, I think there is a lot of work to be done. I don't know if it's going to be done by January 1 This coming year. But this is a change already in August. I mean, yeah. But this also does make a you know, it does start making you think about what do your contributions for next year need to be like, if you are in this bracket, and this does happen. So you do have to plan for this scenario, if you are someone who's going to be impacted by this law, if it goes into effect, and if the companies can catch up, that's true. So there's, you know, a lot that goes into it. But so let's move on from that. Let's go into our one of our favorite questions we always get how much do you need to retire? Or it's usually phrase, how much do I need to retire? But how much do I have the idea? Exactly. So that number has now changed? You know, for longest time it was, I need a million dollars to retire. And then we talked about it last year, the Northwestern Mutual study that people said they now need $1.25 million dollars to retire comfortably. But apparently that is not enough. Now break it down. There is a new survey from Charles Schwab that asked 1000 People who have a 401k, how much they need to retire comfortably. That number is now 1.7 million. That's a big jump from 1.25. So why is that higher? The main reason for the increase has been the impact of inflation and market volatility. I still think that's a big jump even with those factors. And no matter what, so 1.7 1.8, you know, 1.2 5 million, whatever that number is that that's in the millions. Here's the problem. The average retirement account has $113,000 in it, according to Vanguard. So there's just there's this big disparity, and even people who are at retirement age that are 65 and older, they have an average account of $233,000. So there's this wide gap. And we've talked about that before with this retirement crisis that people talk about. But to me, this doesn't really tell the whole story. You know, I know that it's, you know, the $1.7 million is the headline number. But according you can see this chart here, we'll put it on the screen from the Bureau of Labor Statistics, the median annual income for people in their 50s and 60s, fluctuates between 50 and $60,000. Around there. So if you just use that rule of thumb, you know, 4%, that, you know, $1.7 million, or $1.8 million that people say they need would generate about $72,000 of income. And that's not include your social security. So you're telling me that people have a median income right now of we'll just look at the 55 to 64 year old bracket of $58,000. Close to 59,000. They now need 72,000 Plus Social Security, so they'll probably be close to $100,000 of annual income. I guess people want to raise in retirement. I guess. I just I wonder that survey from Schwab. I wonder if what does that actually mean to be retired and to retire comfortably? You know, is that vacations and trips and all the fun stuff that is that the dream lifestyle? Or is that? What do we actually need to retire? You know, pay the dollars? Yeah, I mean, that's like saying right now, how much do you want to make to live comfortably? 1 million point $7? Whereas, you know, how much do you actually need to live right now, that number is gonna be different. So I just wonder what that you know if that number is truly accurate, but apparently, the numbers a lot higher than the 1.25 that we covered before. And it's just, I don't know, stories like that. Give me the I have a tough time with things like that. Those average pause, give me a tremendous amount of pause. And it's even the stories like the average 401 K balanced by age and how much should you have, by this point in your life, I can't stand those studies. Because everybody's different. And it's just it's frustrating. Because in society, how many times we hear, don't compare yourself to other people, you know, we hear all these motivational speakers, stop, compare yourself to others, run your own race, always capable of what you're capable of. I mean, even think about, you know, the whole thing around, you know, body image issues on social media. So, in one instance, it's okay to tell people don't compare yourself to other people on social media, you know, I shouldn't wish that my body looked like the rocks. I mean, I know you wish my body looked like rocks, but I shouldn't. But then on the other hand, we tell people to compare themselves to their peers, when it comes to their money. So just financially speaking, but if I have less money than my peers, but I also have more kids than my peers, do, they need to have the same amount of kids I just don't think that kind of so many factors there are and it's just, I don't like that we're forcing people to compare themselves to other people when it comes to money because everybody lives a different life. You know, some people buy brand name products, some Buy store brand products, and there's a cost difference to that when you go into their shelves they can make the same amount of money one's got coke one's got you know, Dr. Skipper from Safeway. I don't know if Dr. Skipper still affiliate was where I was, that love that stuff. It's the Dr. Pepper off brand. I assumed with a doctor in the name, we even see this, you know, we manage a large four Oh, K plan in the plan provider that we go through their website has a comparison tool built in participants, they plug in their income, and it based on their age and their income, and it compares them to their peers based on their balance. Just how healthy is that? Because I don't know, maybe it's trying to create more of like a driver, like, you should be here. Hey, let's bump that up or what it is soon. Okay, what at a certain point, is there a realization to think, Okay, I'm not going to look like the rock. So why don't I just sit at home and eat donuts and cake. I mean, if it mean that's a pretty negative, but it's the same type of thing. If, if my peers are, let's say 50, or 60, or 70%, above where I'm at financially, and I just go, okay, they might be able to retire, I guess, you know, it's just not in the car. So I'm just going to set a savings money, because what good is going to do I'm just going to go out and spend it. Or, alternately, you could, I don't know, what's the old saying? Tighten up the purse strings? Don't think that's tight? Tighten the bootstraps? Or there's? No, I don't know, anyway, you could get the point. You could Yeah, you could start cutting back on other things. I know, I just, I just don't like that we've, you know, the media and now 401 K participants sites, they're, they're forcing people to compare themselves to others. When in other aspects of life, we say don't do that. But that's just, that's just my little rant for the day. But, you know, to me, it comes down to what makes you individually feel financially secure. That's to me all that matters. Being a financial security now that we've moved away from his personal thoughts, just social get away from those. So speaking of financial security, there was a Bankrate survey that broke down how Americans feel about their financial security. And it did it by gender, race, and then generation seems a little more accurate. Yeah, they asked the question based on your current financial situation, how would you describe your level of financial security? Interesting, when we're gonna put all these numbers up on the screen. But before we dig into those, I will say I do love the fact that it's not broken down by income or savings. And it just does show that the feeling of financial security is truly individualized. It's not necessarily a number. And there are numbers that we'll get to in a minute, but I found this overall feeling. Yeah. So when we break this down, it looks like the least likely to feel financially secure compared to their other generations is the Generation X those individuals who are between 43 and 58 at this point, and I think a lot of that has to attribute to the fact that those people when they started saving were, you know, they were hit with the.com Bubble started to get on their feet probably bought a house and then got hit with the global financial crisis in Oh 708. And it took them longer to get back to just a point of feeling. Okay, Ron's not gonna come out from under me. You know, I so they went through a lot in that generation. It was interesting that the older generations are less hopeful than younger generations about someday achieving financial security. I think that is that because the younger generation might be more naive. And the older generations probably being a little more realistic, because of all the things they've gone through. Of course, I mean, if you're in, you know, generation Gen Z, you know, you're 18 to 26 years old. Yeah, you think the world's rows you have been hit in the mouth yet with life have been knocked down. How many times do we hear? You know, life's gonna get you at some point? I don't think they've been hit with it yet. Whereas baby boomers between 59 and 77. I guarantee you, if you're watching this, you're probably a baby boomer, you probably have some stories that you would love to tell Gen Z about that they'll probably never face. Well, I mean, I think that goes back to just in a sense, you know, my dad walked, you know, to school, uphill both ways. Now, as an adult, I'm like, That's ridiculous. I can't imagine those kinds of stories, saying them to our kids, but I'm sure we'll have some version of that. Right. We walked both ways in the snow. And it was uphill and more ice heatwave? That is true. It isn't the heatwave, because, as I talked about last last week, when you weren't here. It has been it was the hottest month on record in 120,000 years. They somehow have data from 120,000 years ago, but that's just my irritation. I will say, I noticed that there's white Americans, black Americans, Hispanic Americans, as an Asian American. I feel underrepresented here. So what you're not represented not represented this year, man. I guess that's true. There you go. There we go. I'm in there. So yeah, you gotta line. Okay. There we go. All right. People in the survey said that the US economy that is keeping them from achieving their financial security? I mean, right? Yeah, more than three and five financially insecure Americans, or roughly 63%. Point to high inflation, nearly half 48% Blame the economic environment more broadly. And 36% Point to rising interest rates is what's keeping them from feeling financially secure? Yes, all those things are vectors. I have a problem with this. Why? Yes, I have a problem. Because from 2009, through about 2020 will leave, you know, we'll go to 2019. Because you know what, the pandemic kind of changed everything. A little, a little bit, but we'll go. So that's a 10 year period. The Fed was begging for 2% inflation and wasn't getting so we had very low inflation. We had extremely low interest rates. And so were these people who are now, you know, shifting, I don't want to say the blame. I'm not saying they're playing the blame game. But they're moving it to inflation, which has just been high recently. And interest rates that have been just high recently. I wonder where they were. So all these people were these 63% of Americans are financially secure during a period of low inflation, low interest rates? I mean, I feel like there's always going to be something but is that really what is that a real representation? You mean, like an actual, let's just manage my little issue with that. But there will take away there were other reasons where people felt financially insecure. 42% of people felt they had insufficient emergency savings fund, which we've talked about before how important that is. 41% of people said they had insufficient retirement funds, which I'm surprised that number is not higher than the other given the fact that the average account balance is $113,000. And most people feel like they need well over a million dollars close to $2 million to retire comfortably now. So yes, I actually have a little bit of issue with those numbers. That doesn't make sense. This is the segment. Well, we like to call fun with numbers. So yeah, that's, that's what that is. So what does it actually take to feel financially secure? Well, the survey by bank rate broke it down. Now we get into the income part. So overall, people say they needed $233,000 of income to feel financially comfortable. Now, the problem I have with this is that there's a segment of people here that are parents with no children, which I didn't even catch. I'm trying to understand who these parents are, that don't have good dog parents maybe or pet parents. Okay. I understand that people want to say that their pets are like their kids. I fully understand that. However, parents are their children. I hope it's adults with no children, but to label them as parents. I don't know. But the other thing and I think you brought this up, people would know kids say they only need 222,000 No HOURS. However, people with children under the age of 18 need 247,000 hours. They've clearly never had to shop for back school supplies know that it'd be a $25,000 difference for kids. How many kids is that one child, two children? How many kids that I can tell you? It's not enough? It's no, that's got to be like double the income. They're easily. I mean, kids are wanting stuff. I mean, come on. Yeah, well, I can't wait. When our kids are old enough. I would like to just show them. Here's the financial impact. And we just go down to all through the bank statements for the years. These are all the dollars we spent on you. We're never doing that. Obviously. That's terrifying. To think about all the stuff, yeah. school supplies, clothing, not to mention all their extracurricular activities, or even just the summer paying for summer camp alone. Yeah, I mean, kids are expensive. But parents with no children don't have that problem. I digress. So dog parents don't have that problem. But the good thing is that, according to what people actually say, they are attempting to cut things out of their life in order to achieve financial stability. So according to what they say, 73% of people avoid vacations in order to achieve financial stability. Again, don't look at social media. If you believe that number at all. Yeah, 67% say they avoid social outings once again. Yeah, don't look at any social, or would it be maybe they you know, whoever's posting on social media that they're going out? Would they be going out more? And so, or better destinations? Are they doing the I'm going to post it later while I'm back at home? So it looks like I'm still out? Or maybe they have like a blue screen behind? I think it's called a green screen. That's definitely call it a green screen. Not a blue screen screen? No, I know that the writers and actors are on strike in Hollywood, but you definitely don't belong there. You're calling it a blue screen. The one I don't believe is that 56% of people say they would get rid of their car. How are you gonna get around? Now that I don't, I'm sorry. I think that's just you know, when you're, there's gotta be a level of, I'm still talking to another human who's asked me these questions. I don't want to seem like, you know, if they asked me, what would I do to achieve financial stability? Of course, I'd get rid of my car, I would do everything you have been phrased that way. Like, what would you be willing to do? And then like, here's the list. And they're like, Well, yeah, of course. I'll do all those. Yeah, exactly. I mean, 51% of people said they would skip or postpone medical and dental treatments. See, and this one I actually disagree with? I think that people postpone this stuff, because it's out of sight out of mind. I think people don't want to do that stuff. Yeah, I agree. But then the here's where I'll disagree. You know, you strategically plan it to where you do it, where you can knock out your deductible in the beginning of the year. I mean, we I'm doing that, personally, yes, I've, I have got a surgery that day to get, I'm gonna delay that until it can achieve the deductible for the entire family, not something we recommend, obviously, if you need to have a medical procedure, correct. Thank you for the disclaimer and disclosure there. This is not a medical show. If you're watching this for medical reasons, you are to that advice, but I will say one thing that definitely helps people feel more financially secure, is really knowing where they stand. And that's only going to be done through financial planning. And we see this a lot. You know, it seems like every single week, as we work with people on their financial plans, they usually go into that first conversation, not feeling like they have enough to retire or to meet their financial goals. But a lot often, it's because they haven't done the plan to even see where they stand, they just see, you know, certain accounts spread throughout the number, and not really how those accounts actually go towards their, you know, their lifestyle and their retirement. And that's why we've seen people that have successfully retired with well, less than 1.7 or $1.8 million, well, less than a million dollars, and they've retired successfully. It's, you know, the only way you're going to feel financially secure is to go through that financial planning process. So if you haven't done that yet, or you want help, or you need help, use the link in the description below. Schedule a time with a member of our team, we'd be happy to walk you through that. Absolutely. And before we get out of here, what do we want people to do? Again, we want you to subscribe, we never want you to miss one of these amazing episodes. That's right. And we're all happy to have you back. Mel. Thank you. I'm glad you're feeling better. And I know that everybody watching this as well. So with that, I'm Johnathan Rankin. I'm Melissa Rankin, thank you so much for joining us.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.– Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. –  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by johnathan@theoremwm.com. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.

Get Started with Theorem

We’re here to help. Get in touch to request your personalized wealth strategy without cost or obligation.

Get Started