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401K Changes in 2022

401K Changes in 2022

Retirement plans change every year. Here’s how three major changes and one potential change are affecting 401K platforms in 2022.

Major Change #1: Big Annuity Push

The SECURE Act of 2019 did several things, including eliminating stretch IRAs and increasing the required minimum distribution age to 72. It also loosened the liability of employers who offer annuities by providing safe harbors employers can use if an insurer eventually goes bankrupt.

This is important because the guarantees of an annuity are backed, not by the federal government, but by the insurer issuing out the contract. Historically, employers have been reluctant to offer annuities to their 401K participants because of the added risk related to the insurer. Now that the SECURE Act provides a safe harbor, we’re seeing a big push into the annuity side of 401K platforms. This tells us that the insurance industry is pretty powerful at lobbying in DC.

Major Change #2: Pooled Employer Plan

The SECURE Act created a new kind of retirement plan called a Pooled Employer Plan (PEP). This is a centrally administered 401K plan that multiple unrelated employers can join, allowing businesses to outsource their plans.

PEPs are particularly helpful to small employers. Consider that 90% of large employers in the private sector with 500 or more employees have a qualified plan they can offer. By comparison, less than 50% of employers with fewer than 50 employees offer such a plan. PEPs help close the gap for small employers by providing more accessibility and cost-sharing, benefitting employees of small businesses in the process.

Major Change #3: Push to ESG Funds

Environmental Social Governance funds are portfolios of equities and/or bonds affected by environmental, social, and governance factors. This means the investments contained in the fund have passed stringent tests regarding how sustainable the company is in terms of its ESG criteria.

We’re seeing an increased focus on using ESG funds as drivers of investment selections in 2022. At Nelson Financial Planning, we’re not particularly big fans of ESG funds because it’s far too easy to have politics come into the mix. That’s why we tend to stay with more general, broad-based funds that allow you to go where the opportunities are.

Still, the reality is ESG funds are becoming much more a part of 401K platforms in 2022, thanks to a rule the Department of Labor passed last October designed to encourage plan sponsors to employ ESG parameters when selecting plan options. The rule specifically applies to the default option inside the plan. Oftentimes, that’s target date funds, which will now need to have more non-investment factors come into play.

Potential Change: Closing the Loophole on Roth IRA Contributions

This change has not happened yet, but it certainly bears watching.

Under the current rule, you can make a non-deductible IRA contribution if your income is too high to have a Roth IRA. The backdoor Roth takes advantage of a loophole that allows you to do conversions from an IRA to a Roth without meeting any income requirements. It used to be that your income couldn’t be over $100,000 if you wanted to do these conversions, but that rule has been eliminated. This means, even if you are not otherwise eligible for a Roth because your income is too high, you can make a non-deductible IRA contribution and then immediately convert it to a Roth.

The proposal being considered is to close the loophole that allows this backdoor Roth approach. There’s a lot of talk about a new rule potentially taking effect this year, which would also include an income limit increase to around $300,000 or $400,000 on any Roth conversion.

Estate and Gift Tax Changes in 2022

The estate tax exemption for 2022 is $12.06 million. This is the maximum amount of money you can have in your estate when you pass away and not have to pay estate taxes. Just 20 years ago, this number was $1 million. Obviously, the exemption limit has increased dramatically over the years, leaving fewer and fewer people to worry about estate taxes.

However, the estate tax exemption may not always continue to rise. There’s talk of reducing the limit to $3 or $4 million, which would, of course, pick up a lot of people’s estates that are currently exempt.

The wrinkle in all of this is gifting. After all, when we say “estate taxes,” we’re really talking about a combination of estate and gift taxes. Think of it this way—gift taxes and gifting rules apply to gifts you give while still alive. On the other hand, estate taxes and rules come into play after you die. The two are considered a unified structure to prevent someone with a $50 million estate from giving all their money away before they die in an effort to avoid estate taxes.

The annual gift tax exclusion for 2022 is $16,000. However, you can always gift more—simply file a Gift Tax Return with the IRS. There are no immediate tax implications for going above the limit; it merely subtracts your lifetime estate tax exemption from the $12 million mentioned earlier. So know that you can certainly give gifts totaling more than $16,000 using a tax filing to justify and report the amount.

Do you still have questions about what 401K changes to expect in 2022? Are you interested in learning more about estate and gift taxes? No matter your financial standing or what questions you have, Nelson Financial Planning is here to help. We focus on providing personalized retirement advice and estate planning solutions for your peace of mind as you look to the future. To begin crafting a successful financial plan, please contact us online or call our Winter Park, FL, office at 407-629-6477.