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The 2022 U.S. midterm elections have been some of the most contentious in recent years, as voters weigh in on key economic issues such as inflation and taxes. While high prices capture the interest of many voters, the election could lead to some serious changes for retirees and near-retirees, especially as the Republicans have been promising to scale back Social Security and Medicare.
And will Democrats try to change Roth IRA rules and estate taxes, as they did in 2021?
These two major issues and others could find their way onto the upcoming legislative docket when the new term begins, especially if there’s a change in the balance of power in Congress. Here’s what those planning for retirement need to pay attention to and how to better safeguard their retirement.
5 possible financial changes to watch for after the midterm elections
Both major political parties have been pushing changes that could have serious impacts on Americans’ retirement, especially around tax issues and Social Security. Whether any changes are actually made, however, depends on the priority placed on it by the new Congress and whether either political party has enough votes to put new legislation on President Biden’s desk.
Here are some of the biggest areas that retirees and those planning to retire in the future should watch.
Massive overhaul to retirement plans
In a Congress that seems so divided, an overhaul to retirement plans is one of the few areas that seem to be able to gain any kind of bipartisan support. And Americans should be on the lookout for changes to currently existing plans such as 401(k) plans and IRAs.
Some advisors expect Congress to take up bills such as the Retirement Security & Savings Act and the Enhancing American Retirement Now (EARN) Act or ones that emerge with similar goals and provisions.
These acts propose a variety of changes to the existing retirement set-up, including:
- Allowing catch-up contributions for lower earners to go into pre-tax or Roth IRAs
- Requiring a higher threshold for employee contributions to qualify for an employer-matching contribution
- Adjusting hardship distributions for employees
- Increasing the catch-up contribution limit, up to $10,000 annually
- Raising the age for required minimum distributions from age 72 to age 75
- Expanding access to 401(k) plans to part-time workers
- Allowing SIMPLE IRAs on a Roth after-tax basis
Initial versions of the acts have literally dozens of provisions small and large, and what finally makes it into law will have to run the gauntlet of both houses of Congress.
The good news for those hoping to get something through the legislature?
“There is bi-partisan support for the Retirement Security & Savings Act and the Enhancing American Retirement Now (“EARN”) Act, both of which would enhance and improve retirement options and flexibility for current and soon-to-be retirees,” says Ryan D. Brown, partner and attorney at financial planning firm CR Myers & Associates, in Southfield, Michigan.
Increased age for required minimum distributions
Multiple bills have been put forward that raise the age for required minimum distributions from retirement accounts from 72 to 75, so that change may be more likely to occur than others.
This adjustment – called “the most important change on the horizon for retirees” by Joe Cilley, CFP, regional director of financial planning at Merit Financial Advisors in Tacoma, Washington – could greatly help those who have money socked away in a traditional 401(k) or traditional IRA.
“Delaying the required beginning date is the equivalent of a tax break for many of my clients,” says Cilley. “Nearly all of the plans that we put together in my office are negatively influenced by the mandate to draw on, and pay taxes on, retirement accounts.”
Benefit cuts to Social Security
While it’s been difficult to make changes to Social Security in the past, many prominent Republicans, including Florida Senator Rick Scott, have not been all that shy about proposing cuts to the program in one form or another. That might involve cuts to the payouts or what Scott proposes, automatic five-year sunsets on all federal programs, forcing Congress to renew them.
While modest increases in payroll taxes could shore up the program for much longer, Republicans are focused on making actual or de facto cuts to Social Security. These might include increasing the full retirement age, for example, as well as actual reductions in payouts. Either way, it would amount to less money going into the pockets of retirees.
But many wealth managers don’t see much happening to the Social Security of current retirees or near-retirees, simply because it’s too dangerous to cut the benefits of that group. That means the real benefit cuts may come years down the road and be endured by younger Americans.
“It’s difficult to take something away from retirees and expect to get any votes,” says Casey H. Pisano, CFP, wealth advisor, Biondo Investment Advisors in Sparta, New Jersey.
“Change will likely come to those Americans who are thinking the least about these programs right now, for Gen X, millennials, Gen Z and beyond,” says Cilley. He expects younger workers to face a higher full retirement age or higher Social Security taxes, or both, but not immediately.
Even if lawmakers don’t act or refuse to raise taxes, Social Security’s looming budget deficit would force it to cut payouts to just 80 percent of the stated benefits by 2035, according to Social Security trustees.
“What this means for retirement is there’s a risk that benefits in the future will not be as robust as they are now,” says Pisano. “More directly, it doesn’t matter who ends up with control, the risk to Social Security and other programs is elevated and skewed towards cuts.”
However, with just 13 years until that 2035 threshold, many retirees and near-retirees should expect to live into that era and should plan accordingly.
Changes to the estate tax exemption
Currently, federal law allows individuals to avoid estate tax on their first $12.06 million in assets (for 2022) or $12.92 million (for 2023). That’s a hefty amount and has been growing year by year, after a big jump as part of the Tax Cuts and Jobs Act of 2017. However, the threshold sunsets after 2025 and reverts to 2017 levels, which was $5.49 million.
So wealthier retirees should be on the lookout for changes to this exemption amount and whether it’s extended or whether the amount is increased even further.
Limitations on Roth IRA conversions
The Democrats have already tried to eliminate the so-called backdoor Roth IRA in 2021. The backdoor Roth allows workers earning too much for a Roth IRA to contribute to a nondeductible traditional IRA instead and then immediately convert it into a Roth. Would they try again in 2023 or would a bipartisan group propose a bill?
“It’s tough to see any drastic changes here,” says Pisano. “As others have pointed out, Roth conversions require paying tax now and produce vital tax revenue for the government, so I would be shocked to see conversions go away.”
That said, Pisano doesn’t think it’s impossible that the Roth IRA may be limited in some way.
“Backdoor Roth IRAs and other strategies involving Roths may be further limited to exclude high earners, but that’s something we’ve been working with for a long time in the planning and advising community,” he says.
3 strategies retirement planners can use to protect themselves
While changes are uncertain, retirees do have a number of strategies they can take to mitigate those changes or take advantage of them. And don’t forget that there’s a lot of room between Election Day and Congress actually getting something accomplished, if that even occurs.
“Remember that it’s easy to give too much authority to politicians’ decisions in the near term,” says Cilley.
It’s smart to always think proactively and try to be nimble in how you plan your financial life so that you’re not caught off-guard by changes. And when changes are actually a few years out – as they frequently are when the law adjusts – the time to start moving proactively is today. Your retirement plan needs to be robust to many different scenarios and allow you to thrive.
“Current and soon-to-be retirees should focus on saving as much as possible and budgeting their retirements on a fixed-income basis while simultaneously considering increased inflation and rising interest rates,” says Brown.
And for big moves – such as transferring to a smaller home or relocating to a new state – it’s important to think years ahead so that you can time these actions to optimize your plan. For example, now may be a particularly poor time to sell a house, with falling prices and higher mortgage rates.
“The idea of selling one’s home to buy another, or even downsize, doesn’t look the same as it did ten months ago when interest rates and inflation were much lower,” says Brown.
But today you might start planning to act for two or three years out — if rates are lower and the economy is rebounding, it may help push home prices higher again.
Diversify your types of accounts
Diversification works well in investing, helping to smoothen your returns and reduce your risk. But you should also consider taking that approach in the kinds of accounts that you have, too.
“Consider diversifying savings among retirement accounts such as IRAs and 401(k)s as well as Roth IRAs, and regular bank savings and taxable investments,” says Cilley. “Keeping a large portion of wealth only in retirement accounts exposes your assets to the threat of potentially changing income tax rates, changes to the rules for mandatory distributions, and even changes to the rules regarding how your family may use your savings and investments when you’re gone.”
That means it can be valuable to save not only in tax-advantaged retirement accounts but also in regular taxable accounts, too.
Plan to live without Social Security
While 2035 may sound far away, it can take a long time for retirees or near-retirees to replace the income that seems like it will be lost if and when Social Security benefits are cut. If that’s the case, even existing retirees, let alone near-retirees, could easily suffer a benefit cut. You can’t allow your own retirement security to be threatened by such a cut, so plan today.
“I am telling younger people not to count on nearly as much as their parents and grandparents might have, or are currently receiving,” says Pisano.
That means everyone who might be affected – yes, including current retirees – needs to consider how they could replace the lost income. Outliving your income can be a horrendous experience, and about the only good news for younger Americans here is that they may have many decades to prepare their finances for retirement. However, older Americans may not be that lucky and should begin, even if on a modest level, to act today.
Any change in financial rules could potentially expose your financial life to new stresses and strains, but you do have ways to respond and even thrive under new rules. For now, it’s vital to stay calm and not freak out about changes that have yet to be implemented, and then respond appropriately – perhaps with the help of a financial advisor – when it’s time to act.