A Complex Mess: Simple IRA Maximum Contributions 2025 and Beyond
Prior to 2025, it was very easy to explain to an employee what the maximum Simple IRA contribution was for that tax year. Starting in 2025, it will be anything but “Simple”. Thanks to the graduation implementation of the Secure Act 2.0, there are 4 different limits for Simple IRA employee deferrals that both employees and companies will need to be aware of.
Prior to 2025, it was very easy to explain to an employee what the maximum Simple IRA contribution was for that tax year. Starting in 2025, it will be anything but “Simple”. Thanks to the graduation implementation of the Secure Act 2.0, there are 4 different limits for Simple IRA employee deferrals that both employees and companies will need to be aware of.
2025 Normal Simple IRA Deferral Limit
Like past years, there is a normal employee deferral limit of $16,500 in 2025.
NEW: Roth Simple IRA Deferrals
When Secure Act 2.0 passed, for the first time ever, it allowed Roth Deferrals to Simple IRA plans. However, due to the lack of guidance from the IRS, we are still not aware of any investment platforms that are currently accepting Roth deferrals into their Simple IRA platforms. So, for now, most employees are still limited to making pre-tax deferrals to their Simple IRA plan, but at some point, this will be another layer of complexity, whether or not an employee wants to make pre-tax or Roth Simple IRA deferrals.
2025 Age 50+ Catch-up Contribution
Like in past years, any employee aged 50+ is also allowed to make a catch-up contribution to their Simple IRA over and above the regular $16,500 deferral limit. In 2025, the age 50+ catch-up is $3,500, for a total of $20,000 for the year.
Under the old rules, this would have been it, plain and simple, but here are the new more complex Simple IRA employee deferral maximum contribution rules for 2025+.
NEW: Age 60 to 63 Additional Catch-up Contribution
Secure Act 2.0 introduced a new enhanced catch-up contribution starting in 2025, but it is only available to employees that are age 60 – 63. Employees ages 60 – 63 are now able to contribute the regular deferral limit ($16,500) PLUS the age 50 catch-up ($3,500) PLUS the new age 60 – 63 catch-up ($1,750).
The calculation for the new age 60 – 63 catch-up is an additional 50% above the current catch-up limit. So for 2025 it would be $3,500 x 50% = $1,750. For employees ages 60 – 63 in 2025, their deferral limit would be as follows:
Regular Deferral: $16,500
Regular Age 50+ Catch-up: $3,500
New Age 60 – 63 Catch-up: $1,750
Total: $21,750
But, the additional age 60 – 63 catch-up contribution is lost in the year that the employee turns age 64. When they turn 64, they revert back to the regular catch-up limit of $3,500
NEW: Additional 10% EE Deferral for ALL Employees
I wish I could say the complexity stops there, but it doesn’t. Introduced in 2024 was a new additional 10% employee deferral contribution that is available to ALL employees regardless of age, but automatic adoption of this additional 10% contribution depends on the size of the employer sponsoring the Simple IRA plan.
If the employer that sponsors the Simple IRA plan has no more than 25 employees who received $5,000 or more in compensation on the preceding calendar year, adoption of this new additional 10% deferral limit is MANDATORY, even though no changes have been made to the 5304 and 5305 Simple Forms by the IRS.
What that means is for 2025 is if an employer had 25 or fewer employees that made $5,000 in the previous year, the regular employee deferral limit AND the regular catch-up contribution limit will automatically be increased by 10% of the 2024 limit. Something odd to note here: The additional 10% is based just on the 2024 contribution limits, even though there are new increased limits for 2025. (This has been the most common interpretation of the new rules that we have seen to date)
Employee Deferral Limit: $16,500
Employee Deferral with Additional 10%: $17,600 ($16,000 2024 limit x 110%)
Employee 50+ Catch-up Limit: $3,500
Employee 50+ Catch-up Limit with Additional 10%: $3,850 ($3,500 2024 limit x 110%)
What this means is if an employee is covered by a Simple IRA plan in 2025 and that employer had less than 26 employees in 2024, for an employee under the age of 50, the Simple IRA employee deferral limit is not $16,500 it’s $17,600. For employees ages 50 – 59 or 64+, the employee deferral limit with the catch-up is not $20,000, it’s $21,450.
For employers that have 26 – 100 employees who, in the previous year, made at least $5,000 in compensation, in order for the employees to gain access to the additional 10% employee deferral, the company has to sponsor either a 4% matching contribution or 3% non-elective which is higher than the current standard 3% match and 2% non-elective.
NOTE: The special age 60 – 63 catch-up contribution is not increased by this 10% additional contribution because it was not in existence in 2024, and this 10% additional contribution is based on 2024 limits. The age 60 – 63 special catch-up contribution remains at $5,250, regardless of the size of the employer sponsoring the Simple IRA plan.
Summary of Simple IRA Employee Deferral Limits for 2025
Bringing all of these things together, here is a quick chart to illustrate the Simple IRA employee deferral limits for 2025:
EMPLOYER UNDER 26 EMPLOYEES
Employee Deferral Limit: $17,600
Employees Ages 50 – 59: $21,450
Employees Ages 60 – 63: $22,850
Employees Age 64+: $21,450
EMPLOYERS 26 EMPLOYEES or MORE
(Assuming they do not sponsor the enhanced 4% match or 3% non-elective ER contribution)
Employee Deferral Limit: $16,500
Employees Ages 50 – 59: $20,000
Employees Ages 60 – 63: $21,750
Employees Age 64+: $20,000
However, if the employer with 26+ employees sponsors the enhanced employer contribution amounts, the employee deferral contribution limits would be the same as the Under 26 Employees grid.
What a wonderful mess……
Voluntary Additional Simple IRA Non-Elective Contribution
Everything we have addressed up to this point focuses solely on the employee deferral limits to Simple IRA plans. Secure Act 2.0 also introduced a voluntary non-elective contribution that employers can make to their employees in Simple IRA plans. Prior to Secure Act 2.0, the only EMPLOYER contributions allowed to Simple IRA plans was either the 3% matching contribution or the 2% non-elective contribution.
Starting in 2024, employers that sponsor Simple IRA plans are now allowed to voluntarily make an additional non-elective employer contribution to all of the eligible employees based on the LESSER of 10% of compensation or $5,000. This additional employer contribution can be made any time prior to the company’s tax filing, plus extensions.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Rules for Using A 529 Account To Repay Student Loans
When the Secure Act passed in 2019, a new option was opened up for excess balances left over in 529 accounts called a “Qualified Loan Repayment” option. This new 529 distribution option allows the owner of a 529 to distribute money from a 529 account to repay student loans for the beneficiary of the 529 account AND the beneficiary’s siblings. However, this distribution option is not available to everyone, and there are rules and limits associated with these new types of distributions.
When the Secure Act passed in 2019, a new option opened up for excess balances left over in 529 accounts called a “Qualified Loan Repayment” option. This new 529 distribution option allows the owner of a 529 to distribute money from a 529 account to repay student loans for the beneficiary of the 529 account AND the beneficiary’s siblings. However, this distribution option is not available to everyone, and there are rules and limits associated with these new types of distributions.
State Level Restrictions
While the Secure Act made this option available at the Federal level, it’s important to understand that college 529 programs are sponsored at the state level, and the state’s allowable distribution options can deviate from what’s allowed at the Federal Level. For example, specific to this Qualified Loan Repayment option, the Secure Act began allowing these at the Federal Level in 2019, but New York did not recognize these as “qualified distributions” from a 529 account until just recently, in September of 2024.
So, if an owner of a NYS 529 account processed a distribution from the account and applied that amount toward a student loan taken by the beneficiary of the account, it often triggered negative tax events such as having to pay state income tax and a 10% penalty on the earnings portion of the distribution, as well as a recapture of the state tax deduction that was given from the contributions to the 529 account. Fortunately, some states like New York are beginning to change their 529 programs to more closely match the options available at the Federal level, but you still have to check the distribution rules in the state that the account owner lives in before processing distributions from a 529 to repay student loans for the account beneficiary and/or their siblings.
$10,000 Lifetime Limit
There are limits to how much you can withdraw from a 529 account to apply toward a student loan balance. Each BORROWER has a $10,000 lifetime limit for qualified student loan repayment distributions. It’s an aggregate limit per child. So, if the child has multiple 529 accounts that they are the beneficiary of, it’s an aggregate limit of $10,000 between all of their 529 accounts. This is true even if the 529 accounts have different owners. For example, if the parents have a 529 account for their child with a $30,000 balance and the grandparents have a 529 account for the same child with a $10,000 balance, there’s an aggregate limit of $10,000 between both 529 accounts, meaning parents cannot take a $10,000 distribution and apply it toward the child’s student loan balance, and then the grandparents distribute an additional $10,000 to apply to that same child’s outstanding student loan balance.
Sibling Student Loan Payments
In addition to being able to distribute $10,000 from the 529 and apply it towards the account beneficiary's outstanding student loans, the account owner can also distribute up to $10,000 for each sibling of the 529 account beneficiary and apply that toward their outstanding student loan balance. The definition of siblings includes sisters, brothers, stepbrothers, and stepsisters.
Parent Plus Loans
If the parents took out Parent Plus Loans to help pay for their child’s college, after distributing $10,000 to repay student loans in their child’s name, they could then change the beneficiary on the 529 to themselves and distribute $10,000 to repay any outstanding Parent Plus loans taken in the parent’s name since the parent is considered a different “borrower”.
Most but Not All Student Loans Qualify
Most Federal and private student loans qualify for repayment under this special 529 distribution option. However, there is additional criteria to make sure a private student loan qualifies for repayment. The list is too long to include in this article, but just know if you plan to take a distribution from a 529 account to repay a private student loan, additional research is required.
Forfeiting Student Loan Interest Tax Deduction
If a distribution is made from a 529 account and applied toward a student loan, it may limit the taxpayer’s ability to deduct the student loan interest when they file their taxes. The student loan interest deduction is currently $2,500 per year. Whether or not the distribution from the 529 will limit or eliminate the $2,500 tax deduction will depend on how much of the 529 distribution was made to repay the student loans cost basis versus earnings.
Example: If a parent distributes $10,000 from their child’s 529 account and applies it toward their outstanding student loan balance, and $6,000 of the $10,000 was cost basis (what the parent originally contributed to the 529) and $4,000 was earnings, the earnings portion of the distribution is applied against the $2,500 student loan tax deduction amount. So, any distributions made from a 529 to repay a student loan with earnings equal to or greater than $2,500 would completely eliminate the student loan tax deduction for that year.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Tax Filing Requirements For Minor Children with Investment Income
When parents gift money to their kids, instead of having the money sit in a savings account, often parents will set up UTMA accounts at an investment firm to generate investment returns in the account that can be used by the child at a future date. Depending on the amount of the investment income, the child may be required to file a tax return.
When parents gift money to their kids, instead of having the money sit in a savings account, often parents will set up a UTMA Account at an investment firm to generate investment returns that can be used by the child at a future date. But if the child is a minor, which is often the case, we have to educate our clients on the following topics:
How UTMA accounts work for minor children
Since the child will have investment income, do they need to file a tax return?
The special standard deduction for dependents
How kiddie tax works (taxed investment income at the parent’s tax rate)
Completed gifts for estate planning
How UTMA Accounts Work
When a parent sets up an investment account for their child, if the child is a minor, they typically set up the accounts as UTMA accounts, which stands for Uniform Transfer to Minors Act. UTMA accounts are established in the social security number of the child, and the parent is typically listed on the account as the “custodian”. As the custodian, the parent has full control over the account until the child reaches the “age of majority”. Once the child reaches the age of majority, the UTMA designation is removed, the account is re-registered into the name of the adult child, and the child now has full control over the account.
Age of Majority Varies State by State for UTMA
While the age of majority varies state by state, the age of majority for UTMA purposes and the age of majority for all other reasons often varies. For most states, the “age of majority” is 18 but the “UTMA age of majority” is 21. That is true for our state: New York. If a parent establishes an UTMA account in New York, the parent has control over the account until the child reaches age 21, then the control of the account must be turned over to their child.
$18,000 Gifting Exclusion Amount
When a parent deposits money to a UTMA account, in the eyes of the IRS, the parent has completed a gift. Even though the parent has control of the minor child’s UTMA account, from that point forward, the assets in the account belong to the child. Parents with larger estates will sometimes include gifting to the kids each year in their estate planning strategy. Each parent can make a gift of $18,000 (2024 Limit) each year ($36K combined) into the child’s UTMA account, and that gift will not count against the parent’s lifetime Federal and State lifetime estate tax exclusion amount.
A parent can contribute more than $18,000 per year to the child’s UTMA account, but a gift tax return may need to be filed in that year. For more information on this topic, see our video:
Video: When You Make Cash Gifts To Your Children, Who Pays The Tax?
When Does The Minor Child Need To File A Tax Return?
For minor children that have investment income from a UTMA account, if they are claimed as a dependent on their parent’s tax return, they will need to file a tax return if their investment income is above $1,250, which is the standard deduction amount for dependents with unearned income in 2024.
For dependent children with investment income over the $1,250 threshold, the investment is taxed at different rates. Here is a quick breakdown of how it works:
$0 - $1,250: Covered by standard deduction. No tax due
1,250 - $2,500: Taxed at the CHILD’s marginal tax rate
$2,500+: Taxed at the PARENT’s marginal tax rate (“Kiddie tax”)
How Does Kiddie Tax Work?
Kiddie tax is a way for the IRS to prevent parents in high-income tax brackets from gifting assets to their kids in an effort to shift the investment income into their child’s lower tax bracket. For children that have unearned income above $2,500, that income is now taxed as if it was earned by the parent, not the child. This applies to dependent children under the age of 18 at the end of the tax year or full-time students younger than 24.
IRS Form 8615 needs to be filed with the child’s tax return, which calculates tax liability on the unearned income above $2,500 based on the parent's tax rate. A tax note here: in these cases, the parent’s tax return has to be completed before the child can file their tax return since the parent’s taxable income is included in the Kiddie tax calculation. In other words, if the parents put their tax return on extension, the child’s tax return will also need to be put on extension.
Unearned vs Earned Income
This article has focused on the unearned income of a child; if the child also has earned income from employment, there are different tax filing rules. The earned income portion of the child’s income can potentially be sheltered by the $14,600 (2024) standard deduction awarded to individual tax filers.
This topic is fully covered in our article: At What Age Does A Child Have To File A Tax Return?
Investment Strategy for Minor Child’s UTMA
Knowing the potential tax implications associated with the UTMA account for your child, there is usually a desire to avoid the Kiddie tax as much as possible. This can often drive the investment strategy within the UTMA account to focus on investment holdings that do not produce a lot of dividends or interest income. It’s also common to try to avoid short-term capital gains within a child’s UTMA account since a large short-term capital gain could be taxed as ordinary income at the parent’s tax rate.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Do You Have Enough To Retire? The 60 Second Calculation
Do you have enough to retire? Believe it or not, as financial planners, we can often answer that question in LESS THAN 60 SECONDS just by asking a handful of questions. In this video, I’m going to walk you through the 60-second calculation.
Do you have enough to retire? Believe it or not, as financial planners, we can often answer that question in LESS THAN 60 SECONDS just by asking a handful of questions. In this video, I’m going to walk you through the 60-second calculation.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
New Age 60 – 63 401(k) Enhanced Catch-up Contribution Starting in 2025
Good news for 401(k) and 403(b) plan participants turning age 60 – 63 starting in 2025: there is now an enhanced employee catch-up contribution thanks to Secure Act 2.0 that passed back in 2022. For 2025, the employee contributions limits are as follows: Employee Deferral Limit $23,500, Age 50+ Catch-up Limit $7,500, and the New Age 60 – 63 Catch-up: $3,750.
Good news for 401(k) and 403(b) plan participants turning age 60 – 63 starting in 2025: there is now an enhanced employee catch-up contribution thanks to Secure Act 2.0 that passed back in 2022. For 2025, the employee contributions limits are as follows:
Employee Deferral Limit: $23,500
Age 50+ Catch-up: $7,500
New Age 60 – 63 Catch-up: $3,750
401K Age 60 – 63 Catch-up Contribution
Under the old rules, in 2025, a 401(k) plan participant age 60 – 63 would have been limited to the employee deferral limit of $23,500 plus the age 50+ catch-up of $7,500 for a total employee contribution of $31,000.
However, thanks to the passing of the Secure Act in 2022, an additional catch-up contribution will be introduced to employer-sponsored qualified retirement plans, only available to employees age 60 – 63, equal to “50% of the regular catch-up contribution for that plan year”. In 2025, the catch-up contribution is $7,500, making the additional catch-up contribution for employees age 60 – 63 $3,750 ($7,500 x 50%). Thus, a plan participant age 60 – 63 would be able to contribute the regular employee deferral limit of $23,500, plus the normal age 50+ catch-up of $7,500, PLUS the new age 60 – 63 catch-up contribution of $3,750, for a total employee contribution of $34,750 in 2025.
Age 64 – Revert Back To Normal 401(k) Catch-up Limit
This is a very odd way to assess a special catch-up contribution because it is ONLY available to employees between the ages of 60 and 63. In the year the 401(k) plan participant obtains age 64, the new additional age 60 – 63 contribution is completely eliminated. Here is a quick list of the contribution limits for 2025 based on an employee’s age:
Under Age 50: $23,500
Age 50 – 59: $31,000
Age 60 – 63: $34,750
Age 64+: $31,000
The Year The Employee OBTAINS Age 60 – 63
The employee just has to OBTAIN age 60 – 63 during that year to be eligible for the enhanced catch-up contribution. The enhanced catch-up contribution is not pro-rated based on WHEN the employee turns age 60. For example, if an employee turns 60 on December 31st, they are eligible to make the full $3,750 additional catch-up contribution for the year.
By that same token, if the employee turns age 64 by December 31st, they are no longer allowed to make the new enhanced catch-up contribution for that year.
Optional Provision At The Plan Level
The new 60 – 63 enhanced catch-up contribution is an OPTIONAL provision for qualified retirement plans, meaning some employers may allow this new enhanced catch-up contribution while others may not. If no action is taken by the employer sponsoring the plan, be default, the new age 60 – 63 catch-up contributions starting in 2025 will be allowed.
If an employer prefers to opt out of allowing employees ages 60 – 63 from making this new enhanced catch-up contribution, they will need to contact their TPA firm (third-party administrator) as soon as possible to amend their plan to disallow this new type of employee contributions starting in 2025.
Contact Payroll Company
Since this a brand new 401(k) employee contribution starting in 2025, we strongly recommend that plan sponsors reach out to their payroll company to make sure they are aware that your plan will either ALLOW or NOT ALLOW this new age 60 – 63 catch-up contribution, so the payroll system doesn’t incorrectly cap employees age 60 – 63 from making the additional catch-up contribution.
Formula: 50% of Normal Catch-up Contribution
For future years, the formula for this age 60 – 63 enhanced catch-up contribution is 50% of the regular catch-up contribution limit. The IRS usually announces the updated 401(k) contribution limits in either October or November of each year for the following calendar year. For example, if the IRS announces that the new catch-up limit in 2026 is $8,000, the enhanced age 60 – 63 catch-up contribution would be $4,000 over the regular $8,000 catch-up limit.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Surrendering an Annuity: Beware of Taxes and Surrender Fees
There are many reasons why individuals decide to surrender their annuities. Unfortunately, one of the most common reasons that we see is when individuals realize that they were sold the annuity by a broker and that annuity investment was either not in their best interest or they discover that there are other investment solutions that will better meet the investment objectives. This situation can often lead to individuals making the tough decision to cut their losses and surrender the annuity. But before surrendering their annuity, it’s important for investors to understand the questions to ask the annuity company about the surrender fees and potential tax liability before making e the final decision to end their annuity contract.
There are many reasons why individuals decide to surrender their annuities. Unfortunately, one of the most common reasons that we see is that individuals realize they were sold the annuity by a broker that was either not in their best interest, or they discover that there are other investment solutions that will better meet their investment objectives. This situation can often lead to individuals making the tough decision to cut their losses and surrender the annuity. But before surrendering their annuity, it’s important for investors to understand the questions to ask the annuity company about the surrender fees and potential tax liability before making the final decision to end their annuity contract.
Surrender Fee Schedule
Most annuities have what are called “surrender fees,” which are fees that are charged against the account balance in the annuity if the contract is terminated within a specific number of years. The surrender fee schedule varies greatly from annuity to annuity. Some have a 5-year surrender schedule, others have a 7-year surrender schedule, and some have 8+ year surrender fees. Typically, the amount of the surrender fees decreases over time, but the fees can be very high within the first few years of obtaining the annuity contract.
For example, an annuity may have a 7-year surrender fee schedule that is as follows:
Year 1: 8%
Year 2: 7%
Year 3: 6%
Year 4: 5%
Year 5: 4%
Year 6: 3%
Year 7: 3%
Year 8+: 0%
If you purchased an annuity with this surrender fee schedule and two years after purchasing the annuity you realize it was not the optimal investment solution for you, you would incur a 7% surrender fee. If your annuity had a $100,000 value, the annuity company would assess a $7,000 surrender fee when you cancel your contract and move your account.
When It Makes Sense To Pay The Surrender Fee
In some cases, it may make financial sense to pay the surrender fee to get rid of the annuity and just move your money into a more optimal investment solution. If a client has had an annuity for 6 years and they would only incur a 3% surrender fee to cancel the annuity, it may make sense to pay the 3% surrender fee as opposed to waiting 2 more years to surrender the annuity contract without a surrender fee. For example, if the annuity contract is only expected to produce a 4% rate of return over the next year, but they have another investment solution that is expected to produce an 8%+ rate of return over that same one-year period, it may make sense to just surrender the annuity and pay the 3% surrender fee, so they can start earning those higher rates of return sooner, which essentially more than covers the surrender fee that they paid to the annuity company.
Potential Tax Liability Associated with Annuity Surrender
An investor may or may not incur a tax liability when they surrender their annuity contract. Assuming the annuity is a non-qualified annuity, if the cash surrender value is not more than an investor's original investment, then there would not be a tax liability associated with the surrender process because the annuity contract did not create any “gain” in value for the investor. However, if the cash surrender value is greater than the initial investment in the contract, then the investors would trigger a realized gain when they surrender the contract, which is taxed at an ordinary income tax rate. Annuity investments do not receive long-term capital gain preferential tax treatment for contacts held for more than 12 months like stocks and other investments held in brokerage accounts. The gains are always taxed as ordinary income rates because it’s technically an insurance contract.
Not all annuity companies list your total “cost basis” on your statement. Often, we advise clients to call the annuity company to obtain their cost basis in the policy and have the annuity company tell them whether or not there would be a tax liability if they surrendered the annuity contract. You can call the annuity company directly; you do not need to call the broker that sold you the annuity.
If there is no tax liability associated with surrendering the contract, surrendering the contract can be an easy decision for an investor. However, if there is a large tax liability associated with surrendering an annuity, some tax planning may be required. There are tax strategies associated with surrendering annuities that have unrealized gains, such as if you are close to retirement, you could wait to surrender the annuity until the year that you are fully retired, making the taxable gain potentially subject to a lower tax rate. We have had clients that have surrendered an annuity, incurred a $15,000 taxable gain, and then turned around and contributed $15,000 more, pre-tax, to their 401(k) account at work, which offset the additional taxable income from the annuity surrender in that tax year.
Is Paying The Surrender Fee and Taxes Worth It?
For investors who face either a surrender fee, taxes, or both when surrendering an annuity contract, the decision of whether or not to surrender the annuity contract comes down to whether or not paying those taxes and/or penalties is worth it, just to get out of that annuity that was not the right fit in the first place. Or maybe it was the right investment when you first purchased it, but now your investment needs have changed, or there is a better investment opportunity elsewhere. If there are no surrender fees and minimal tax liability, the decision can be very easy, but when large surrender fees and/or tax liability exists, additional analysis is often required to determine if delaying the surrender of the annuity contract makes sense.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Why Do Wealthy Families Set Up Foundations and How Do They Work?
When a business owner sells their business and is looking for a large tax deduction and has charitable intent, a common solution is setting up a private foundation to capture a large tax deduction. In this video, we will cover how foundations work, what is the minimum funding amount, the tax benefits, how the foundation is funded, and more…….
When a business owner sells their business or a corporate executive receives a windfall in W2 compensation, some of these individuals will set up and fund a private foundation to capture a significant tax deduction, and potentially pre-fund their charitable giving for the rest of their lives and beyond. In this video, David Wojeski of the Wojeski Company CPA firm and Michael Ruger of Greenbush Financial Group will be covering the following topics regarding setting up a private foundation:
What is a private foundation
Why do wealthy individuals set up private foundations
What are the tax benefits associated with contributing to a private foundation
Minimum funding amount to start a private foundation
Private foundation vs. Donor Advised Fund vs. Direct Charitable Contributions
Putting family members on the payroll of the foundation
What is the process of setting up a foundation, tax filings, and daily operations
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Tax-Loss Harvesting Rules: Short-Term vs Long-Term, 30-Day Wash Rule, $3,000 Tax Deduction, and More…….
As an investment firm, November and December is considered “tax-loss harvesting season” where we work with our clients to identify investment losses that can be used to offset capital gains that have been realized throughout the year in an effort to reduce their tax liability for the year. But there are a lot of IRS rule surrounding what “type” of realized losses can be used to offset realized gains and retail investors are often unaware of these rules which can lead to errors in their lost harvesting strategies.
As an investment firm, November and December is considered “tax-loss harvesting season”, where we work with our clients to identify investment losses that can be used to offset capital gains that have been realized throughout the year to reduce their tax liability for the year. But there are a lot of IRS rules surrounding what “type” of realized losses can be used to offset realized gains, and retail investors are often unaware of these rules which can lead to errors in their lost harvesting strategies. In this article, we will cover loss harvesting rules for:
Realized Short-term Gains
Realized Long-term Gains
Mutual Fund Capital Gains Distributions
The $3,000 Annual Realized Loss Income Deduction
Loss Carryforward Rules
Wash Sale Rules
Real Estate Investments
Business Gains or Losses
Short-Term vs Long-Term Gain and Losses
Investment gains and losses fall into two categories: Long-Term and Short-Term. Any investment, whether it’s a stock, mutual fund, or real estate, if you buy it and then sell it within 12 months, that gain or loss is classified as a “short-term” capital gain or loss and is taxed to you as ordinary income.
If you make an investment and hold it for more than 1 year before selling it, your gain or loss is classified as a “long-term” capital gain or loss. If it’s a gain, it’s taxed at the preferential long-term capital gains rates. The long-term capital gains tax rate that you pay varies based on the amount of your income for the year (including the amount of the long-term capital gain). For 2024, here is the table:
Note: For individuals in the top tax bracket, there is a 3.8% Medicare surcharge added on top of the federal 20% long-term capital gains tax rate, so the top long-term capital gains rate ends up being 23.8%. For individuals that live in states with income tax, many do not have special tax rates for long-term capital gains and they are simply taxed as additional ordinary income at the state level.
What Is Year End Loss Harvesting?
Loss harvesting is a tax strategy where investors intentionally sell investments that have lost value to generate a realized loss to offset a realized gain that they may have experienced in another investment. Example, if a client sold Nvidia stock in May 2024 and realized a long-term capital gain of $100,000 in November and they look at their investment portfolio an notice that their Plug Power stock has an unrealized loss of $100,000, if they sell the Plug Power stock and generate a $100,000 realized loss, it would completely wipes out the tax liability on the $100,000 gain that they realized on the sale of their Nvidia stock earlier in the year.
Loss harvesting is not an all or nothing strategy. In that same example above, even if that client only had $30,000 in unrealized losses in Plug Power, realizing the loss would at least offset some of the $100,000 realized gain in their Nvidia stock sale.
Long-Term Losses Only Offset Long-Term Gains
It's common for investors to have both short-term realized capital gains and long-term realized capital gains in a given tax year. It’s important for investors to understand that there are specific IRS rules as to what TYPE of investment losses offset investment gains. For example, realized long-term losses can only be used to offset realized long-term capital gains. You cannot use realized long-term losses to offset a short-term capital gain.
Short-Term Losses Can Offset Both Short-Term & Long-Term Gain
However, realized short-term losses can be used to offset EITHER short-term or long-term capital gains. If an investor has both short-term and long-term gains, the short-term realized losses are first used to offset any short-term gains, and then the remainder is used to offset the long-term gains.
Loss Carryforward
What happens when your realized loss is greater than your realized gain? You have what’s called a “loss carryforward”. If you have unused realized investment losses, those unused losses can be used to offset investment gains in future tax years. Example, Joe sells company XYZ and has a $30,000 realized long-term loss. The only other investment income that Joe has is a short-term gain of $5,000. Since you cannot use a long-term loss to offset a short-term gain, Joe’s $30,000 in realized long-term losses cannot be used in this tax year. However, that $30,000 loss will carryforward to the next tax year, and if Joe has a long-term realized gain of $40,000 that next year, he can use the $30,000 carryforward loss to offset a larger portion of that $40,000 realized gain.
When do carryforward losses expire? Answer: never (except for when you pass away). The carryforward loss will continue until you have a gain to offset it.
$3,000 Capital Loss Annual Tax Deduction
Even if you have no realized capital gains for the year, it may still make sense from a tax standpoint to generate a $3,000 realized loss from your investment accounts because the IRS allows you deduct up to $3,000 per year in capital losses against your ordinary income. Both short-term and long-term losses qualify toward that $3,000 annual tax deduction.
Example: Sarah has no realized capital gains for the year, but on December 15th she intentionally sells shares of a mutual fund to generate a $3,000 long-term realized loss. Sarah can now use that $3,000 loss to take a deduction against her ordinary income.
Tax Note: You do not need to itemize to take advantage of the $3,000 tax deduction for capital losses. You can elect to take the standard deduction when filing your taxes and still capture the $3,000 tax deduction for capital losses.
The $3,000 annual loss tax deduction can also be used to eat up carryforward losses. If we go back to our example with Joe who had the $30,000 realized long-term loss, if he does not have any future capital gains to offset them with the carryforward loss, he could continue to deduct $3,000 per year against his ordinary income over the next 10 years, until the loss has been fully deducted.
Mutual Fund Capital Gain Distribution
For investors that use mutual funds as an investment vehicle within a taxable investment account, certain mutual funds will issue a “capital gains distribution”, typically in November or December of each year, which then generates taxable income to the shareholder of that mutual fund, whether they sold any shares during the year.
When mutual funds issue capital gains distributions, it’s common that a majority of the capital gains distributions will be long-term capital gains. Similar to normal realized long-term capital gains, investors can loss harvest and generate realized losses to offset the long-term capital gains distribution from their mutual fund holdings in an effort to reduce their tax liability.
The Wash Sale Rule
When loss harvesting, investors have to be aware of the IRS “Wash Sale Rule”. The wash sale rule states that if you sell a security at a loss and the rebuy a substantially identical security within 30 days following the date of the sale, a realized loss cannot be captured by the taxpayer.
Example: Scott sells the Nike stock on December 1, 2024 which generates a $10,000 realize loss, but then Scott repurchases Nike stock on December 25, 2024. Since Scott repurchased Nike stock within 30 days of the sell day, he can no longer use the $10,000 realized loss generated by his sell transaction on December 1st due to the IRS 30 Day Wash Rule.
Also make note of the term “substantially identical” security. If you sell the Vanguard S&P 500 Index ETF to realize a loss but then purchase the Fidelity S&P 500 Index ETF 15 days later, while they are two different investments with different ticker symbols, the IRS would most likely consider them substantially identical triggering the Wash Sale rule.
Real Estate & Business Loss Harvesting
While most of the examples today have been centered around stock investments, the lost harvesting strategy can be used across various asset classes. We have had clients that have sold their business, generating a large long-term capital gain, and then we have them going into their taxable brokerage account looking for investment holdings that have unrealized losses that we can realize to offset the taxable long-term gain from the sale of their business.
The same is true for real estate investments. If a client sells a property at a gain, they may be able to use either carryforward losses from previous tax years or intentionally realize losses in their investment accounts in the same tax year to offset the taxable gain from the sale of their investment property.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Huge NYS Tax Credit Available For Donations To The SUNY Impact Foundation
There is a little-known, very lucrative New York State Tax Credit that came into existence within the past few years for individuals who wish to make charitable donations to their SUNY college of choice through the SUNY Impact Foundation. The tax credit is so large that individuals who make a $10,000 donation to the SUNY Impact Foundation can receive a dollar-for-dollar tax credit of $8,500 whether they take the standard deduction or itemize on their tax return. This results in a windfall of cash to pre-selected athletic programs and academic programs by the donor at their SUNY college of choice, with very little true out-of-pocket cost to the donors themselves once the tax credit is factored in.
There is a little-known, very lucrative New York State Tax Credit that came into existence within the past few years for individuals who wish to make charitable donations to their SUNY college of choice through the SUNY Impact Foundation. The tax credit is so large, that individuals who make a $10,000 donation to the SUNY Impact Foundation can receive a dollar-for-dollar tax credit of $8,500 whether they take the standard deduction or itemize on their tax return. This results in a windfall of cash to pre-selected athletic programs and academic programs by the donor at their SUNY college of choice, with very little true out-of-pocket cost to the donors themselves once the tax credit is factored in.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Trump Tax Plan for 2025: Social Security, Tips, Overtime, SALT Cap, and more….
It seems as though the likely outcome of the 2024 presidential elections will be a Trump win, and potentially full control of the Senate and House by the Republicans to complete the “full sweep”. As I write this article at 6am the day after election day, it looks like Trump will be president, the Senate will be controlled by the Republicans, and the House is too close to call. If the Republicans complete the full sweep, there is a higher probability that the tax law changes that Trump proposed on his campaign trail will be passed by Congress and signed into law as early as 2025.
It looks as though the likely outcome of the 2024 presidential election will be a Trump win, and potentially full control of the Senate and House by the Republicans to complete the “full sweep”. As I write this article at 6am the day after election day, it looks like Trump will be president, the Senate will be controlled by the Republicans, and the House is too close to call. If the Republicans complete the full sweep, there is a higher probability that the tax law changes that Trump proposed on his campaign trail will be passed by Congress and signed into law as early as 2025. Here are the main changes that Trump has proposed to the current tax laws:
Making Social Security Completely Exempt from Taxation
Exempting tips from income taxes
Exempting overtime pay from taxation
A new itemized deduction for auto loan interest
Dropping the corporate tax rate from the current 21% down to 15%
Eliminating the $10,000 SALT Cap
Extension of the Tax Cut & Jobs Act beyond 2025
Even if the Democrats end up hanging on to the House by a narrow margin, there is still a chance that some of these tax law changes could be passed in 2025.
Social Security Exempt From Taxation
This one is big for retirees. Under current tax law, 85% of Social Security retirement benefits are typically taxed at the federal level. Trump has proposed that all Social Security Benefits would be exempt from taxation, which would put a lot more money into the pocket of many retirees. For example, if a retiree receives $40,000 in social security benefits each year and they are in the 22% Fed bracket, 85% of their $40,000 is currently taxed at the Federal level ($34,000), not paying tax on their social security benefit would put $7,480 per year back in their pocket.
Note: Most states do not tax social security benefits. This would be a tax change at the federal level.
Exempting Tips from Taxation
For anyone who works in a career that receives tips, such as waiters, bartenders, hair stylists, and the list goes on, under current tax law, you are supposed to claim those tips and pay taxes on those tips. Trump has proposed making tips exempt from taxation, which for industries that receive 50% or more of their income in tips could be a huge windfall. The Trump proposed legislation would create an above-the-line deduction for all tip income, including both cash and credit card tips.
Overtime Pay Exempt From Taxation
For hourly employees who work over 40 hours per week and receive overtime pay, Trump has proposed making all overtime wages exempt from taxation, which could be a huge windfall for hourly workers. The Tax Foundation estimates that 34 million Americans receive some form of overtime pay during the year.
Auto Loan Interest Deduction
Trump has also proposed a new itemized deduction for auto loan interest. However, since it’s likely that high standard deductions will be extended beyond 2026, if there is a full Republican sweep, only about 10% of Americans would elect to itemize on their tax return as opposed to taking the standard deduction. A taxpayer would need to itemize to take advantage of this new proposed tax deduction.
Reducing The Corporate Tax Rate from 21% to 15%
Trump proposed reducing the corporate tax rate from the current 21% to 15%, but only for companies that produce goods within the United States. For these big corporations, a 6% reduction in their federal tax rates could bring a lot more money to their bottom line.
Eliminating the $10,000 SALT Cap
This would be a huge win for states like New York and California, which have both high property taxes and state income taxes. When the Tax Cut and Jobs Act was passed, it was perhaps one of the largest deductions for individuals who resided in states that had both state income tax and property taxes referred to as the SALT Cap (State and Local Taxes). Trump has proposed extending the Tax Cut and Jobs Act but eliminating the $10,000 SALT cap.
For example, if you currently live in New York and have property taxes of $10,000 and you pay state income tax of $20,000, prior to the passing of the Tax Cut and Jobs Act, you were able to itemize your tax deductions and take a $30,000 tax deduction at the federal level. When TCJA passed, it capped those deductions at $10,000, so most individuals defaulted into just taking the standard deduction and lost some of that tax benefit. Under these proposed tax law changes, taxpayers will once again be able to capture the full deduction for their state income taxes and property taxes making itemizing more appealing.
No Sunset For The Tax Cut and Jobs Act
The Tax Cut and Jobs Act was passed by Trump and the Republican Congress during his first term. That major taxation legislation was scheduled to expire on December 31, 2025, which would have automatically reverted everything back to the old tax brackets, standard deductions, loss of the QBI deduction, etc., prior to the passing of TCJA. If the Republicans gain control of the House, there is a very high probability that the tax laws associated with TCJA will be extended beyond 2025.
Summary of Proposed 2025 Tax Law Changes
There could be a tremendous number of tax law changes starting in 2025, depending on the ultimate outcome of the election results within the House of Representatives. If a full sweep takes place, a large number of the reforms that were covered in this article could be passed into the law in 2025. However, if there is a divided Congress, only a few changes may make it through Congress. We should know the outcome within the next 24 to 48 hours.
It’s also important to acknowledge that these are all proposed tax law changes. Before passing them into law, Congress could place income limitations on any number of these new tax benefits, and/or new tax law changes could be introduced. It should be a very interesting 2025 from a tax standpoint.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
