At the start of 2023, advisors are looking ahead to the policy and tax changes that will affect their high net worth clients. These include changes resulting from the passage of the Secure 2.0 Act. Read on for the 2023 policy and tax changes advisors expect for high net worth clients.
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The Safe Law 2.0
The Secure 2.0 Act was passed by Congress in December and added changes for taxpayers, including high net worth clients.
For example, high net worth individuals benefit from the age update for required minimum benefits (RMDs). The age requirement for RMDs has been increased to 73 years and will go to 75 years in 2033.
“In this scenario, the client has more time to convert tax-deferred assets into tax-exempt assets, such as a Roth IRA,” said Kevin Chancellor, financial advisor and CEO of Black Lab Financial Services.
“If the customer is not already drawing Social Security, they can also take their deferred taxes as income before their RMD age so they can defer Social Security,” says Chancellor. “This strategy could lower the tax on their benefit, as well as potential increases in their Medicare costs.”
Another change in the Secure 2.0 Act that high net worth individuals can take advantage of is this: The Secure Act 2.0 allows penalty-free rollovers from a 529 plan to Roth IRAs. But there is a limit on how much can be rolled over. The lifetime rollover limit from a 529 plan to an IRA is $35,000, and annual rollovers will be in line with the annual IRA contribution limit.
The impact of rising interest rates on charities
In an environment where interest rates are rising, advisors are looking at charitable rest trusts (CRTs) and their potential benefits for high net worth clients.
These trusts allow clients to donate assets to charity and receive annual income for life or for a specified period of time, according to the IRS.
“With a charitable remainder, the higher interest rates rise, the higher the payout percentage for the retained variable or fixed annuity is calculated,” said Richard Austin, certified wealth management analyst, certified exit planning consultant and executive director at Integrated Partners. “CRTs are a great planning tool for deferring taxes, creating charitable deductions and phasing the realization of profits over time.”
The demise of the tax cuts and jobs law in 2025
While the end of the Tax Cuts and Jobs Act won’t be until December 2025, advisers are looking at smart tax moves that high net worth individuals should make while there’s still time.
“Wealthy high net worth clients should look at taking advantage of current lifetime gift exemptions, currently $12.92 million per person for 2023, before the Tax Cuts and Jobs Act of 2017 expires at the end of 2025,” said Andy Watts, certified financial planner and vice president. president of investment solutions at Avantax Wealth Management.
Insurance strategies can provide opportunities for high net worth clients. “For those who already fund their employer-sponsored plans and IRAs and are high-earning younger customers, overfunding life insurance can build cash value based on tax deferrals,” says Watts.
It boils down
Advisors and high net worth clients will not receive a tax review in 2023. But there are opportunities for high-income individuals to be proactive in the face of rising rates, possible tax hikes and policy changes from Capitol Hill.
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