While the rest of us were busy wishing a not-so-fond farewell to the strange year that was 2012, our friends in Washington were burning the midnight oil to hammer together a last-minute workaround to the fiscal cliff fiasco.
And hidden in that documentation — along with the regular mix of year-end riders attached to such a Hail Mary-styled piece of legislation, including tax breaks for NASCAR and the alternative fuel industry — were a couple of tangible impacts to the retirement world, though one may offer just short-term benefits.
First up, it looks as though folks hoping to roll over their regular 401(k)s to Roth 401(k)s may get an opportunity for a long-term tax break — lord knows you're going to need one, as your taxes really are going to go up.
A new provision in the package will allow 401(k), 403(b) and 457(b) participants to make the leap to a Roth 401(k) without waiting for the traditional qualifying events (retirement, reaching age 59 1/2 or changing jobs).
Why? Because doing so immediately sends that tax deferral — which you'll have to pay up front — to Washington, rather than waiting until your far-off retirement day, and Washington wants your taxes.
The Congressional Budget Office and the Joint Committee on Taxation claim this might provide $12 billion in "found money" over the next 10 years, and those leaders are excited to get anything they can to add to the books right now.
It's also a huge opportunity for regular folks to make that Roth conversion - provided they have the financial wherewithal to pay those taxes much sooner than later.
That's a nice gesture if you'd like the money to go to your kids and not have them pay future taxes; if you can do the math (and hopefully participants will be interested in getting your professional advice in doing so), the long-term benefits could be good for even austere investors.
Some, however, suggest that the Roth switcheroo is in fact the worst budget gimmick possible in the entire fiscal cliff deal as ... it only thinks short-term for the goverment. More on that kind of thinking, in a second.
Secondly, if you're feeling particularly magnanimous, seniors will also be allowed to donate as much as $100,000 from their IRA to charity, a tax break that initially expired at the end of 2011, but has been extended as part of the package. If you (or your client, more likely) can work out the donation between now and the end of the month, it can count towards the 2012 RMD.
A couple of small pieces of good news, right?
You in the retirement advisor or plan administrator world may now breathe a sigh of relief that other, larger tax deferral benefits of 401(k)s and the like escaped unscathed in the fiscal cliff ruckus: Don't get ahead of yourself. You're now on the radar.
As Forbes has eloquently reported, those tax-hungry elected officials — so mean-spirited that they're not even going to throw more cash in the direction of Hurricane Sandy reconstruction efforts — finally noticed the not-so-insignificant impact that America's retirement savings plans have on the immediate tax coffers, and they're interested in the money.
They're not particularly interested in the long term, mind you - such as, what they're going to do to help the millions of retirement savers 20 years down the road if they hijack your still-puny 401(k). The Roth deal is a somewhat short-sighted example of this thinking, as it's only got a 10-year window.
Apparently, retirement savings is someone else's problem, and there's a very appealing $100 billion in annual tax breaks from our collective retirement tools that they'd be more than happy to use to re-balance the books, rather than touching sacred cows like defense spending or ... did we mention the NASCAR tax breaks?
The story's far from over and the memories of the 1986 tax-grab and contribution slashing for the 401(k) are suddenly flooding back. So hang on. It's going to be a bumpy ride.
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