Can You Break an Irrevocable Trust?

Individuals will frequently set up an Irrevocable Trust and then transfer ownership of various assets, such as brokerage accounts, savings accounts, and real estate, into the trust to protect those assets from the Medicaid spenddown process in the event of a future long-term care need. As a part of the planning process, it is typically recommended that individuals only transfer assets into the trust that they will not need to access in order to meet future expenses. But what happens when someone realizes they have transferred too much into their trust, and they now need access to that asset? The options may be very limited.

Limited Access to Irrevocable Trust Assets

The primary reason that setting up an Irrevocable Trust, also known as a Medicaid Trust, can be an effective way to protect assets from a future long-term care event, is the “grantor” (the person giving the assets to the trust), it essentially giving away the ownership of that asset to their Irrevocable Trust.  By transitioning ownership away from the grantor, if a long-term care event occurs, those assets do not need to be “spent down” for the grantor to qualify for Medicaid for the purpose of paying the costs associated with their long-term care.

In order for this strategy to work, the irrevocable trust has to limit the grantor’s access to the “principal” of the trust assets.  In other words, if, as the grantor, you gift $100,000 into your Irrevocable Trust, you are not allowed to touch that $100,000 for the remainder of your life since you have “irrevocably” gifted those assets to your trust.

Grantors Typically Have Access to Trust Income

While the grantor is unable to access trust principal, most grantors of irrevocable trusts give the grantor access to any “income” generated by their trust. If the trust is holding investments, income refers to only the dividends and interest and does not include the “appreciation” in the trust assets, which is still considered principal.

Example: Sue gifts $200,000 in cash to her irrevocable trust, and then invests that $200,000 in stocks, bonds, CDs, and mutual funds. Over the course of the first year, the value of the trust grew from $200,000 to $220,000; $5,000 of that growth was dividends and interest, and the other $15,000 was the appreciation in the value of the investment holdings. If Sue’s trust document grants her access to the income generated by the trust assets, she would be allowed to withdraw the $5,000 in dividends and interest. However, she would not have access to the $200,000 initial investment or the $15,000 in gains from the appreciation of the underlying investment holdings, only the income from dividends and interest is available to the grantor.

Rules Vary from Trust to Trust

But what if the income is not enough? What if something has happened that now requires Sue, in the example above, to get access to $100,000 of the cash that she contributed to her Irrevocable Trust? The answer lies in the provisions that are built within Sue’s trust document.

This trust document governs what can and cannot be done with assets owned by the trust. Since trust and estate attorneys often take different approaches when drafting trust documents, the options are NOT UNIFORM for all irrevocable trusts. The grantor must work with the attorney drafting the trust to determine what fail-safes, if any, will be built into the trust document. 

Gifting Rights

The trust document can voluntarily allow the trustee, who may or may not be the same person as the grantor, to make gifts from the principal of the trust to the trust’s beneficiaries. The grantor is typically not a beneficiary of the trust.  A common scenario is a parent, or parents, are the grantor(s), fund the trust and select one of their children to serve as trustee (who oversees the trust assets), and then the beneficiaries of the trust are all of the children of the grantor(s).

If the trustee is given gifting powers, the trustee could gift cash directly from the trust to the grantor's children, and then the children could voluntarily turn around and gift cash back to their parents to cover expenses or pay expenses on their parents' behalf.

This is where trust documents vary as well. Some trusts, even with gifting power, do not allow the beneficiaries to make cash gifts back to the grantors, and in those cases, the kids (beneficiaries) have to pay the expenses directly on behalf of their parents (grantor), such as rent, medical expenses, roof, etc., without the parents every coming into contact with the cash that was distributed from the trust to the kids.

Caution: A note of caution when adding gifting powers to a trust. If you give the trustee the power to make gifts from the trust assets, you must 200% trust the person that you have selected to serve as your trustee. As financial planners, we have unfortunately seen a few cases of trustees abusing their gift powers, and it’s not a pretty sight. 

Revoking A Trust

The trust document may also permit a full or partial revocation of the trust assets, resulting in the dissolution of the trust and the return of the trust assets to the grantor. Often, when a trustee seeks to revoke all or a portion of the trust assets, it requires the approval of all the trust beneficiaries. For example, if there are three children, and one of them is money-hungry and does not want to see their inheritance go back to their parents and be spent, they may be able to stop the trust revocation process by simply not agreeing to the revoke the trust assets.

Partial Versus Full Revoke

Some trusts allow a partial revocation of trust assets, while other trust documents only permit a full revocation if approved by the trust’s beneficiaries.  Partial revocation can be an attractive option because it allows some of the trusts principal to be returned to the grantor, but any assets that remain in the irrevocable trust will continue to be protected from future long-term care events, assuming the trust has satisfied the Medicaid lookback period. 

For example, parents fund a trust with $400,000 in cash, and 10 years after the trust is established, an unexpected medical event occurs requiring them to pay $50,000 which they don’t have. If the trust allows a partial revocation of the trust assets, the trustees and beneficiaries could agree to revoke $50,000 of the trust assets, return them to the parents, and the remaining $350,000 stays protected in the irrevocable trust.

However, we have seen trust documents that only allow a full revocation, which then makes it an all-or-nothing decision.

Change Trust Investment Strategy to Generate More Income

We have encountered situations where the trust document does not permit gifts, and it does not allow for partial or full revocation of the trust assets - so what options are left?

From a return of trust principal standpoint, the grantors may be out of luck, however, since most grantor irrevocable trusts give the grantors access to “income” generated by the trust assets, the grantors may be able to work with their trustee to change the investment holdings within the trust to produce more dividends and interest income. For example, if the trust was holding mostly growth stocks that do not pay dividends, the trustee could work with the trust's investment advisor to reallocate the portfolio to stocks and bonds that produce more dividend and interest income, which can then be distributed to the grantors to cover their personal expenses.

Tax Note: When reallocating irrevocable trust accounts, the trustee must be cautious of the taxable realized gains that arise from selling investments in the trust that have significantly appreciated in value. Since most of these Medicaid trusts are set up as “grantor” trusts, even though the grantor does not have access to the principal of the trust, the grantor is typically responsible for paying any tax liability generated by the trust assets.  In other words, if the trust generates a significant tax liability from trade activity, the grantor may be required to pay that tax liability without being able to make a distribution from the trust assets.

Disclosure: I’m a Certified Financial Planner, not a trust and estate attorney. The information in this article was gathered through my firsthand interaction with trusts and our clients. This information is for educational purposes only. For legal advice, please contact an attorney.  

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.

Mandatory 401(k) Roth Catch-up Details Confirmed by IRS January 2025

On January 10, 2025, the IRS issued proposed regulations that provided much-needed clarification on the details associated with the Mandatory Roth Catch-up Contribution rule for high-income earners that are set to take effect on January 1, 2026. Employers, payroll companies, and 401(k) providers alike will undoubtedly be scrambling for the remainder of 2025 to get their systems ready for this restriction that will be placed on 401(k) plans starting in 2026.

This is a major change within 401(k) plans, and it is not a welcome change for high-income earners, since individuals in high tax brackets typically like to defer as much as they can pre-tax into 401(k), 403(b), and 457 plans to reduce their current tax liability. Here’s a quick list of the items that will be covered in this article:

• General overview of new mandatory 401(k) Roth Catch-up Requirement

• Income threshold for employees that will be impacted by the new rule

• Definition of “wages” for purposes of the income threshold

• Will it apply to Simple IRA plans as well?

• “First year of employment” exception for the new Roth rule

• Will a 401(k) plan be required to adopt Roth deferrals prior to 1/1/26? 

401(k) Mandatory Roth Catch-up Contributions

When an employee reaches age 50, they can make an additional employee deferral called a catch-up contribution. Prior to 2026, all employees were allowed to select whether they wanted to make their catch-up contributions in pre-tax, Roth, or a combination of both. Starting in 2026, the freedom of choice will be taken away from W-2 employees that have more than $145,000 in wages in the prior calendar year (indexed for inflation).   

Employees that are above the $145,000 threshold for the previous calendar year, are with the SAME employer, and are age 50 or older, will not be given the option to make their catch-up in pre-tax dollars. If an employee over this wage threshold wishes to make a catch-up contribution to their qualified retirement plan (401K, 403b, 457b), they will only be given the Roth deferral option.

Definition of Wages

One of the big questions that surfaced when the Secure Act 2.0 regulations were first released regarding the mandatory Roth catch-up contribution was the definition of “wages” for the purpose of the $145,000 income threshold. The IRS confirmed in their new regulation that only wages subject to FICA tax would count towards the $145,000 threshold. This is good news for self-employed individuals such as sole proprietors and partnerships that have earnings that are more than the $145,000 threshold, but do not receive W-2 wage, allowing them to continue to make their catch-up contributions all pre-tax for years 2026+.

So essentially, you could have partners of a law firm making $500,000+, and they would be able to continue to make catch-up contributions all pre-tax, but the firm could have a W-2 attorney on their staff that makes $180,000 in wages, and that individual would be forced to make their catch-up contributions all in Roth dollars and pay income tax on those amounts.

Will Mandatory Roth Catch-up Apply to Simple IRA Plans?

Many small employers sponsor Simple IRA plans, which also allow employees aged 50 or older to make pre-tax catch-up contributions, but at lower dollar limits.  Fortunately, Simple IRA plans have been granted a pass by the IRS when it comes to the new mandatory Roth catch-up contributions. All employees that are covered by a Simple IRA plan, regardless of their wages, will be allowed to continue to make their catch-up contributions, all pre-tax, for tax years 2026+.

First Year of Employment Exception

Since the $145,000 wage threshold is based on an employee’s “prior year” wages, the IRS confirmed in the new regulations that an employer is allowed to give employees a pass on making pre-tax catch-up contributions during the first calendar year that the company employs them. Meaning, if Sue is hired by Company ABC in February of 2025 and makes $250,000 from February – December in 2025, she would be allowed to contribute her 401(k) catch-up contributions all pre-tax if she is over 50 years old, since Sue doesn’t have wages with Company ABC in 2024, even though her wages for the 2025 were over the $145,000 threshold.

Some High-Income Employees Will Get A 2-Year Pass

There are also situations where new employees with wages over $145,000 will get a 2-year pass on the application of the mandatory Roth catch-up rule. Let’s say Tim is hired by a law firm as a W-2 employee on July 1, 2025, at an annual salary of $200,000.  Tim automatically gets a pass for 2025 for the mandatory Roth catch-up, because he did not have wages in 2024 with that company. However, between July 1, 2025 – December 31, 2025, he will only earn half his salary ($100,000), so when they look at Tim’s W-2 wages for purposes of the mandatory Roth catch-up in 2026, his 2025 W-2 will only be showing $100,000, allowing him to make his catch-up contribution all pre-tax in both 2025 and 2026.  

Will 401(k) Plans Be Forced to Adopt Roth Deferrals

Not all 401(k) or 403(b) plans allow employees to make Roth employee deferrals. Roth deferrals have historically been an optional provision within an employer-sponsored retirement plan that a company had to voluntarily adopt. When the regulations for the new mandatory Roth catch-up were first released, the regulations seemed to state that if a plan did not allow Roth deferrals, NO EMPLOYEES, regardless of their wage level, were allowed to make catch-up contributions to the plan.

In the proposed regulations that the IRS just released, the IRS clarified that if a retirement plan does not allow Roth deferrals, only the employees above the $145,000 wage threshold would be precluded from making contributions. Employees below the $145,000 wage threshold would still be able to make catch-up contributions pre-tax, even without the Roth deferral feature in the plan.

Due to this restriction, it is expected that if a plan did not previously allow Roth deferrals, many plans will elect to adopt a Roth deferral option by January 1, 2026, to avoid this restriction on their employees with wages in excess of $145,000 (indexed for inflation). 

For more information on this new Mandatory Roth Catch-Up Contribution effective 2026, please see our article: https://www.greenbushfinancial.com/all-blogs/roth-catch-up-contributions-high-wage-earners-secure-act-2

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.

Inherited IRA $20,000 State Tax Exemption for New York Beneficiaries Under Age 59 ½

For individuals who inherit a retirement account in New York state, there is a little-known tax law that allows an owner of an inherited IRA to distribute up to $20,000 from their inherited IRA EACH YEAR without having to pay New York State income tax on those distributions.   While this $20,000 state tax exemption typically only applies to individuals age 59 ½ or older, there is a special rule that allows beneficiaries of retirement accounts to “inherit” the $20,000 tax exemption from the decedent and avoid having to pay state tax on the distributions from their Inherited IRA, even though they themselves are under the age of 59 ½.  

Inherited IRA Owners Under Age 59½

If you inherit a retirement account and you are under the age of 59 ½, there is a whole host of rules that you have to follow in regard to the new 10-Year Distribution Rule, required minimum distributions, and beneficiaries grandfathered in under the old “stretch rules.”  We have a separate article that covers these topics in detail:

GFG Article on Inherited IRA Rules for Non-spouse Beneficiaries    

However, for the purposes of this article, we are just going to focus on the taxation of distributions from inherited IRAs, specifically the tax exemption for residents of New York State.

Universal Tax Rules at the Federal Level

Regardless of what state you live in, there are tax laws at the federal level that apply to all owners of inherited IRA accounts.  The two main rules are:

1. For inherited IRA owners that are under the age of 59 ½, the 10% early withdrawal penalty does not apply to distributions taken from an inherited IRA.

2. All distributions from inherited IRA accounts are subject to taxation at the federal level.

IRA Taxation Rules Vary State by State

While the federal taxation rules are the same for everyone, the state rules for the taxation of inherited IRAs vary from state to state.    In this article, we will be focusing on the inherited IRA tax rules for residents of New York State.

New York State IRA Taxation

New York has a special rule that once an individual reaches age 59 ½ they are allowed to take distributions from pre-tax retirement account sources and not pay NYS Income tax on the first $20,000 each year.  This includes distributions from any type of pre-tax IRA, 401(k), private pension plans, or other types of pre-tax employer-sponsored retirement plans. 

But……..New York has another special rule that allows a beneficiary of a retirement account to INHERIT the decedent’s $20,000 state income tax exemption and use it when they take distributions from the inherited IRA account, even though the beneficiary may be under the age of 59 ½. 

Rule 1:  Decedent Must Have Reached Age 59 ½

For the beneficiary to “inherit” the decedent’s $20,000 NYS IRA tax exemption, the decent must have reached age 59 ½ before they passed away.   If the decedent passed away prior to age 59 ½, the beneficiaries of the retirement account are not eligible to inherit the $20,000 NYS tax exemption.

Rule 2:  The Beneficiary Must Be A Resident of New York

In order to qualify for the $20,000 NYS tax exemption on the distributions from the inherited IRA account, the beneficiary must be a resident of New York State, which makes sense because if the beneficiary was not a resident of New York, they would not be filing a NY tax return.

Rule 3:  The $20,000 NYS Exemption with Multiple Beneficiaries

It’s not uncommon for someone to have more than one beneficiary assigned to their retirement accounts.  For purposes of the allocation of the NYS $20,000 exemption, the $20,000 annual exemption is split evenly between the beneficiaries of their retirement accounts.  For example, if Sue passed away at age 62 and her 2 children Tracy and Mia, both New York Residents, are listed as 50%/50% beneficiaries, once the assets have been moved into the inherited IRAs for Tracy and Mia, they would both be eligible to claim a $10,000 state tax exemption each year for any distributions taken from the Inherited IRA even though Tracy & Mia are both under that age of 59 ½.

Rule 4:  What If One of the Beneficiaries Lives Outside of New York?

But what happens if not all of the beneficiaries are New York residents? Does the beneficiary that lives in New York get to keep the full $20,000 New York State tax exemption?

Answer: No.  In cases where one beneficiary is a NY resident and there are other beneficiaries that live outside of New York State, the $20,000 New York State tax exemption is still split evenly among the number of beneficiaries even though there is no tax benefit for the beneficiaries that are domiciled outside of New York.

Follow Up Question:  Is there any way for the beneficiaries outside of New York to assign their portion of the $20,000 NYS IRA tax exemption to the beneficiary that lives in New York?  Answer: No.

Rule 5:  Multiple Retirement Accounts with Different Beneficiaries

So what happens if Tim is age 35, and is the 100% beneficiary of his father’s Traditional IRA, but his father also had a 401(k) account with Tim and his 3 siblings listed as beneficiaries?  Does Tim get the full $20,000 NYS exemption for distribution from his Inherited IRA that came from the IRA that he was the sole beneficiary of?

Answer: No.  Technically, the $20,000 exemption is split evenly among all of the beneficiaries of the decedent’s retirement accounts in aggregate.  In the example above, since Tim was one of four beneficiaries on his father’s 401(k), he would be allocated $5,000 (25%) of the $20,000 New York State exemption each year.

Rule 6:  How Would You Find Out “IF” There Are Other Beneficiaries?  

There are cases where someone will get notified that they are a beneficiary of a retirement account without knowing who the other beneficiaries are on that account.  Most custodians will not disclose who the other beneficiaries are, they typically just notify you of the share of the retirement account that you are entitled to.  In this case, how do you know how to split up the $20,000 NYS exemption?

Answer: That is an excellent question. I have no idea.

Rule 7:  The $20,000 exemption is an ANNUAL Exemption

The $20,000 NYS tax exemption for distributions from inherited IRAs is an ANNUAL exemption, meaning the owners of the inherited IRAs can use this exemption each year.  For example, Ryan’s father passed away at age 70, Ryan is only age 45, he was the sole beneficiary of his father’s Traditional IRA account, Ryan would be allowed to distribute $20,000 per year for his Inherited IRA account and he would avoid having to pay New York State income tax on those distributions up to $20,000 each year. 

Tax Note: Once the annual distributions exceed $20,000, NYS income tax will apply.

Rule 8: Beneficiary Already Age 59 ½ or Older

If a non-spouse beneficiary is a New York resident and already age 59 ½ or older, do they get to claim both their own $20,000 NYS tax exemption on distributions from their personal pre-tax retirement accounts and then another $20,000 exemption from the inherited accounts?

Answer: No. The $20,000 NYS tax exemption has an aggregate limit for all pre-tax retirement accounts in a given tax year.

Rule 9:  State Pensions PLUS $20,000 NYS Exemption

New York also has the favorable rule that if you are receiving a NYS pension, the amount received from the state pension does not count towards the $20,000 annual IRA tax exemption rule.  For example, you could have someone who retired from NYS at age 55 is receiving a NYS pension for $40,000 per year, and if they inherited an IRA, they may also be able to exclude the first $20,000 distributed from the IRA from NYS income taxation.

Tax Strategies For Non-Spouse Beneficiaries Subject to 10-Year Rule

Now that many non-spouse beneficiaries are subject to the new Secure Act 10-Year Rule, requiring them to deplete the inherited IRA within 10 years, if the decedent was over the age of 59 ½ when they passed, it’s important to proactively plan the distribution schedule to take full advantage of the $20,000 NYS tax exemption otherwise owners of the inherited IRA could end up paying more taxes to New York State that could have been avoided.

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.

Trump Tariffs 2025 versus Trump Tariffs 2017 to 2020: The Stock Market Reaction

President Trump just announced tariffs against Canada, Mexico, and China that will go into effect this week, which has sent the stock market sharply lower.  I have received multiple emails from clients over the past 24 hours, many asking the same question:

“With the Trump tariffs that were just announced, should we be going to cash?”

Investors have to remember that we have seen Trump’s tariff playbook during his first term as president between 2017 and 2020, but investors' memories are short, and they forget how the stock market reacted to tariffs during his first term.   While history does not always repeat itself, today we are going to look back on how the stock market reacted to the Trump tariffs during his first term, how those tariffs compare in magnitude to new tariffs that were just announced, and what changes investors should be making to their investment portfolio.

Trump Tariffs 2017 – 2020

During Trump’s first term as president, he introduced multiple rounds of tariffs, including the tariffs in 2018 on solar panels, washing machines, steel, and aluminum.  The tariffs were levied against Canada, Mexico, and the European Union.   Throughout his first term, he also escalated tariffs against China, which led to the news headlines of the trade war during his first four years in office.

How did the U.S. stock market react to these tariff announcements?  Similar to today, not good.  There were sharp selloffs in the stock market in the days following each tariff announcement, but here were the returns for the S&P 500 Index during Trump’s first term in office:

2017:    21.9%

2018:   -4.41%

2019:    31.74%

2020:   18.38%

If we are looking to history as a guide, the first round of Trump tariffs created heightened levels of volatility in the markets, financially harmed specific industries in the U.S., and raised prices on various goods and services throughout the US economy. In the end, despite all of the negative press about the tariffs and trade wars, the U.S. stock market posted solid gains in 3 of the 4 years during Trumps first term as president.

The Trump Tariffs Are Larger This Time

However, we also have to acknowledge the difference between the tariffs that were announced in Trump’s first term and the tariffs that were just announced on February 2, 2025.  The tariffs that Trump just announced are dramatically larger than the tariffs that we imposed during his first term, which could translate to a larger impact on the U.S. economy and higher prices.  During his first term, Trump was very strategic as to which types of goods would be hit with the tariffs, but the latest round of tariffs is a 25% tariff on ALL goods from Canada and Mexico (with the exception of oil) and a 10% tariff on goods coming from China.

Negotiating Tool

Trump historically has used tariffs as a negotiating tool.  During his first term, there were multiple rounds of delays in the tariffs being implemented as trade terms were negotiated; that could happen again. Even if the tariff is implemented this week, it’s tough to estimate how long those tariffs will stay in place, if they will be reduced or increased in coming months, and since they are so widespread this time, which industries in the US will get hit the hardest in this new round of tariffs.

U.S. Unfair Advantage in the Tariff Game

While the trade war / tariff game hurts all countries involved because it ultimately drives prices higher on specific goods and services, investors have to acknowledge the advantage that the United States has over other countries when tariffs are imposed.  The U.S……by FAR…..is the largest consumer economy in the WORLD, so when we put tariffs on goods coming into our country, the US consumer historically will begin to shift their buying habits to lower-cost goods or buy less of those higher-cost items.

While the US consumer feels some pain from the impact of higher costs on the imported goods being tariffed, the pain is 3x or 5x for the country that tariffs are being imposed on because it’s immediately impacting their sales in the largest consumer economy in the world.   This is why Trump has identified tariffs as such a powerful negotiating tool, even if the action that the president is trying to resolve has nothing to do with trade.

Investor Action

While the knee-jerk reaction to the tariff announcement may be to run for the hills, in our opinion, it’s too soon to make a dramatic shift in investment strategy given the opposing forces of the possible outcomes to the stock market beyond the initial reaction from the stock market. On the positive side of the argument, the stock market reacted similarly to the tariff announcements during his first term but still produced sizable gains throughout that four-year period.  We don’t know how long these tariffs may be in place, they may not be permanent, or they may be reduced as negotiations progress. Third, the U.S. economy is healthy right now and may be able to absorb some of the negative impact of short-term price increases from the tariffs.

On the other side of the argument, the tariffs are much larger this time compared to Trump’s first term so it could have a larger negative impact. Also, the tariffs this round are broader versus the more surgical approach that he took during his first term, which could negatively impact more businesses in the US than it did the first time.  Third, the retaliatory tariffs by Canada, Mexico, and China could be larger this time, which again, could have a larger negative impact on the U.S. economy compared to the 2017 – 2020 time frame.

The word “could” is used a lot in this article because the tariffs were just announced, and there are so many outcomes that could unfold in the coming months.  When counseling clients on asset allocation, we find it prudent to hold off on making dramatic changes to the investment strategy until the path forward becomes clearer, even though it’s very tempting to want to react immediately to the events that trigger market sell-offs.

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.

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 gradual 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 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 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:

1. How UTMA accounts work for minor children

2. Since the child will have investment income, do they need to file a tax return?

3. The special standard deduction for dependents

4. How kiddie tax works (taxed investment income at the parent’s tax rate)

5. 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. 

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:                         $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 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.