clear wine glass with water

Changes to retirement programs while you were on Christmas break

The so-called Secure Act 2.0, signed into law December 29, 2022, has changed some of the basics of retirement programs for 2023 and beyond, so do be aware.
The maximums you can contribute have gone up, and this may be the greatest benefit for most people who can afford to contribute.
1. Roths now have a contribution of $6,500, with a $1,000 additional catch-up if you’re over 50. This is $500 more than last year. Same for traditional deductible IRAs.
2. If you have a 401k, 403b, 457, or Roth 401k, you can contribute up to $22,500; over 50 you can add another $7,500 for a total of $30,000, up from $27,000 in 2022.
3. HSAs can now snare $3,850 for individuals and $7,750 from families, with $1,000 catch ups.

Another change was that you can delay required minimum distributions from your 401k, 403b, and traditional IRAs until 73 beginning in 2023, and until 75 beginning in 2033. I’m not sure this is actually a good idea, for several reasons:
• It encourages people to keep on working, when maybe they should consider that it’s time to stop, enjoy life, and make way for somebody younger.
• It staves off urgency to save, because, well, you may as well just work forever.
• Once you start RMDs, the required amount will be larger and could possibly kick you into a higher tax bracket where you’ll pay more taxes on your money in a shorter period of time.
• If you never actually get to spend your money, your heirs will probably be in their highest earning years and so they’ll pay more taxes on the money than a retired person might have.
Still, given the hits to investments in the past year, many people will be glad to let their investments ride a little longer without being forced to sell off in an already low market.

It’s depressing to think that the French are going to the mat to protest increasing the retirement age from 62 to 64, while Americans are faced with being forced, er encouraged, to work longer and longer or face retirement poverty on the relatively puny Social Security. And pensions—what’s that?

There are a number of other changes that depend on the discretion of plan sponsors, not individuals. For example, plan sponsors may allow linking of accounts to an emergency fund, consider student loan payments as deferrals for matching, and make emergency withdrawals available. What they actually do offer remains to be seen, and will depend somewhat (as usual) by pressure from employees or their unions. We’re likely to see that pressure exerted on big employers, but more than 99% of people work for small employers—and many don’t even offer retirement plans. So, one faint cheer for better workers’ rights.

woman wearing blue denim jacket holding book

Changes to college savings

 

Change your thinking! Don’t get stuck following old rules. Tax-favored college savings plans (know as 529s) have had several changes in the last couple of years, and more are upcoming for 2023-2024.

1. You can use them for a kid’s elementary and high school tuition, whereas they were only available for college in previous years. Why would you want to do this? Maybe the child is going to an expensive private school pre-college, but you’re expecting a somewhat cheaper, perhaps state university. Or, the grandparents have set aside significant money or promised to fund college. Or you have stock grants that will vest in 3 years, in time for college but not available now. Usually, the big-ticket item is college, but not necessarily.

2. Federal aid formulas will no longer count grandparent contributions withdrawn from a grandparent-owned 529 plan as student income, as of 2023-2023. It will not be counted against the student for financial aid determinations. Of course, this is only important if the student would be actually eligible for federal student aid. Private colleges can ask about anything they want, and use it in their own private formulae for awarding their own, non-federal funds.
Nearly all private colleges will require the family to file a FAFSA form, but even if a family doesn’t qualify for federal aid, they may still qualify for aid from a private college, especially if the school is seeking to attract the student. But don’t depend on it, and don’t brush off saving with the tired, “My kid is so smart they’ll get a scholarship”. So is every other kid. Don’t bank on it (pun intended).
3. You can contribute more, and you can front-load (as in, you got a bonus or windfall). In 2023, the annual gift tax exclusion rises from $16,000 to $17,000. This applies to each beneficiary, from each donor/giver. Each single yearly gift to each recipient cannot exceed $16,000/$17,000. In addition, there’s a provision for “front-loading” by giving 5 years’ worth of exclusions in one lump sum ($80,000/$85,000 per donor), using up the gift tax exclusion of each donor. But what if you wanted to give more—say, $20,000 to a grandchild per year? The grandparents will need to file a gift return documenting how much more they’ve given, which will count against their lifetime exclusion of $12.6 million. If you anticipate your estate will exceed $12.6 million, your heirs will need to present copies of your gift tax returns. Note: no gift tax is due at the time you give the money—you’re only creating a record to be applied against your estate. Most people will not have a estate that meets the $12.6 million threshold, so likely no gift tax will ever be due. You just need to keep the record and file the form.

4. You can rollover a 529 account to an ABLE account, up to the annual contribution limit In the tragic event that your child becomes disabled before age 26, the money can be transferred to an ABLE account to fund qualified disability expenses, including housing and education. This is a somewhat complex procedure and you’ll probably need to see me about your specific circumstances, but it does allay one fear of contributing—that the money will not be lost or taxed if the child doesn’t go on to further education.

An economical hobby

Depending on what you choose, hobbies can be expensive. If your hobby requires a great deal of expensive equipment and travel (such as skiing or sailing), it’s going to take some careful scrutiny to fit that into a budget. It’s all going to have to come out of your discretionary budget, and only after savings have been fully funded.

I might contend that sometimes the collecting of materials for a hobby is actually a hobby in itself. Some people (ahem) can hardly resist the beauty of materials like yarn, fabric, embroidery floss, art materials…whether or not we’ll ever have time to make something out of them. In fact, making something, which means choosing one concrete creation instead of all the possible dreams, may act to spoil the fun.

However, the internet and maybe even the pandemic  have taught us there are cheaper ways of acquiring knowledge—YouTube and even subscription sites are far cheaper than live lessons with an individual, or the cost of a three day conference seminar. I’m definitely not discounting the value of a live instructor, but if we’re sampling a possible new skill or trying to reactivate something we already know a bit about, it can be very economical to begin online. Online also gives you a community, no matter your location, job, previous experience, age…really, it’s opened up the world for pursuits where it can be hard to find enough people and information in one place.

I’ve seen some discouraging posts  lately on some music sites. You have to be very careful to scrutinize marketing—anyone that promulgates they are the “only way to learn” while charging a hefty fee should be suspect.  My strong advice is to look for a money back guarantee in case you don’t like what you’ve paid for. For example, I recently subscribed to a guitar program that I adored—for the first 30 days. Then, for some reason, the owner decided to update his well-functioning website. For one week (which I was paying for), the site was down entirely—with no extensions offered. Then, for the next 3 weeks it mal-functioned, crashed, and offered significantly less material than previously. As far as I can tell, all the “improvement” consisted of a change in theme colors. I exercised my money-back guarantee on the 59th day, after hoping against hope that it would be fixed. Two months after, I hear it still isn’t.  I feel a lot like what I felt when you have a great first date and never hear from the person again.

Having been rejected by a potential guitar teacher as pretty much too old to bother with, I’ve thought a lot about why an adult might want to take up or return to a hobby. Are you ever too old to learn something? Should teachers only be interested in young students with conservatory potential? Obviously, I believe this is defeatist, aging self-talk. After all, when possible, you should use your money on things which enhance your life. Here’s what I came up with while mind-mapping. While it’s mostly focused on guitar, perhaps it will apply to a pursuit you are considering.

  • Now you can recapture something you loved as a young person, but life intervened.
  • Now you can enjoy the sheer joy of playing an instrument without the pressure of getting into a university program. No more tryouts!
  • Now you have the luxury of time to perfect a piece. The process can be more important and more satisfying than any result.
  • You can learn to play an instrument where even the simplest pieces sound wonderful (unlike, say, violin). N.B. but if violin or French horn is your interest, you’ll put up with the sounds, as has every other learner before you.
  • You can get a decent instrument for far cheaper than many others (such as piano, harp).
  • It’s easily portable. You can play with a group or other instruments.
  • As an adult, your knowledge of the world of music is much larger—you’ve simply heard more than kids. If not, playing guitar can introduce a whole new world.
  • The instrument itself is beautiful and a pleasure to pick up every day.
  • You can take up a challenge to learn something uniquely beautiful and relatively uncommon that many people wouldn’t have the courage to do.

When I become disgruntled with my “lack of progress” (to where?), I plan to review this. It’s a good use of time and money to improve your life. And it doesn’t have to cost a fortune.