The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, otherwise known as SECURE 2.0, is a piece of legislation that focuses on how employers and their employees are able to save for retirement and how it impacts their bottom lines.
Businesses with as many as 50 employees can receive a tax credit when they offer a defined contribution plan to employees. The start-up tax credit permits up to 100 percent of start-up costs ($5,000 annually) to offset administrative expenses to implement a start-up plan. However, for businesses with 51 to 100 employees, the first SECURE Act’s tax credit equal to 50 percent of administrative costs, capped at $5,000, remains in effect.
SECURE 2.0 also allows for an employer tax credit of up to $1,000 per employee, effective Jan. 1, 2023, when the business contributes to defined contribution plans as long as the employee makes no more than $100,000 annually. It’s phased down over a five-year period. For employers with 51 to 100 employees, the credit phases down based on the number of active employees.
Another tax credit is for eligible employers that employ military spouses. Beginning in 2023, employers with up to 100 employees making at least $5,000 annually are able to obtain a general tax credit, up to $500 for three years as long as they meet the following conditions in conjunction with the company’s defined contribution plan:
Qualified employees enroll within two months of onboarding.
Once qualified, an employee is entitled to plan benefits he wouldn’t otherwise be eligible for until after 24 months of employment, such as the employer deposit of an amount equal to what the employee contributes to his plan.
Contributions from the business are assigned in full to the employee.
The $500 tax credit is comprised of $300 contributed by the employer to the employee and $200 based upon eligible military spouse participation.
Employers may utilize the tax credit during the year the military spouse is onboarded and the following two tax years. Employees also need to attest to their status to qualify.
If an employee is married to someone who is actively serving in the armed services, that person is considered a military spouse. However, if such an individual is considered a Highly Compensate Employee (HCE), he or she must be excluded from this definition based on compensation level.
Based on IRS regulations, there are two different tests that determine if an employee is an HCE and determines eligibility for contribution plan participation by employees and potential tax implications for employers. The first test is an ownership test; the other is a compensation test to determine if an employee is an HCE.
Looking at the compensation test, the IRS’ HCE Threshold for 2022 and 2023 is $135,000 and $150,000 in compensation, respectively. The ownership test looks at whether an employee owns 5 percent of the business during the determination year or within the present plan year. If the same employee has the same 5 percent ownership stake within the lookback year, which is the past 12 months immediately preceding the determination year, they are deemed to meet the ownership test.
While each company has different attributes and must navigate the tax code based on their own circumstances, understanding how the SECURE 2.0 law works is one way to make the most of tax obligations.
How Secure 2.0 Will Impact Employers’ Tax Situations
March 1, 2023 · Blog, General Business News, Uncategorized
⏱ 3 min read
The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, otherwise known as SECURE 2.0, is a piece of legislation that focuses on how employers and their employees are able to save for retirement and how it impacts their bottom lines.
Businesses with as many as 50 employees can receive a tax credit when they offer a defined contribution plan to employees. The start-up tax credit permits up to 100 percent of start-up costs ($5,000 annually) to offset administrative expenses to implement a start-up plan. However, for businesses with 51 to 100 employees, the first SECURE Act’s tax credit equal to 50 percent of administrative costs, capped at $5,000, remains in effect.
SECURE 2.0 also allows for an employer tax credit of up to $1,000 per employee, effective Jan. 1, 2023, when the business contributes to defined contribution plans as long as the employee makes no more than $100,000 annually. It’s phased down over a five-year period. For employers with 51 to 100 employees, the credit phases down based on the number of active employees.
Another tax credit is for eligible employers that employ military spouses. Beginning in 2023, employers with up to 100 employees making at least $5,000 annually are able to obtain a general tax credit, up to $500 for three years as long as they meet the following conditions in conjunction with the company’s defined contribution plan:
Qualified employees enroll within two months of onboarding.
Once qualified, an employee is entitled to plan benefits he wouldn’t otherwise be eligible for until after 24 months of employment, such as the employer deposit of an amount equal to what the employee contributes to his plan.
Contributions from the business are assigned in full to the employee.
The $500 tax credit is comprised of $300 contributed by the employer to the employee and $200 based upon eligible military spouse participation.
Employers may utilize the tax credit during the year the military spouse is onboarded and the following two tax years. Employees also need to attest to their status to qualify.
If an employee is married to someone who is actively serving in the armed services, that person is considered a military spouse. However, if such an individual is considered a Highly Compensate Employee (HCE), he or she must be excluded from this definition based on compensation level.
Based on IRS regulations, there are two different tests that determine if an employee is an HCE and determines eligibility for contribution plan participation by employees and potential tax implications for employers. The first test is an ownership test; the other is a compensation test to determine if an employee is an HCE.
Looking at the compensation test, the IRS’ HCE Threshold for 2022 and 2023 is $135,000 and $150,000 in compensation, respectively. The ownership test looks at whether an employee owns 5 percent of the business during the determination year or within the present plan year. If the same employee has the same 5 percent ownership stake within the lookback year, which is the past 12 months immediately preceding the determination year, they are deemed to meet the ownership test.
While each company has different attributes and must navigate the tax code based on their own circumstances, understanding how the SECURE 2.0 law works is one way to make the most of tax obligations.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact a professional regarding the topics in these articles. The images linked to these articles are protected by copyright and should not be copied for any reason.
Customer loyalty is critical to any successful business strategy in today’s digital age. With emerging technologies such as the internet of things (IoT), companies are now leveraging a new approach called the internet of behavior (IoB) to gain deeper insights into their customers’ behavior and preferences.
What is IoB?
The internet of behavior exists because of the internet of things. IoT is the interconnection of physical digital objects that gather and exchange information over the internet. On the other hand, IoB makes sense of the collected data from various sources, including wearable devices, digital household devices, human online activity and social media.
The acronym internet of behavior (IoB) was coined by Gartner, a tech research firm, as identified among the top 10 trends in their strategic technology report for 2021. However, the concept of using data to influence customer behavior was developed in 2012 by Göte Nyman, a psychology professor at the University of Helsinki, long before the internet of things took hold.
Gartner defines IoB as an extension of the internet of things, focusing on capturing, processing and analyzing the “digital dust” of people’s daily lives.
Simply put, IoB interconnects IoT, consumer psychology and data analytics. The data is analyzed in terms of behavioral psychology to capture patterns that marketing and sales teams can use to influence customer behavior.
How IoB can Influence Customer Loyalty
Aside from products and services, customer experience has become a significant factor in business success. By understanding customer behavior, businesses can leverage IoB data to influence customer loyalty in various ways.
To take advantage of IoB, companies study insights extracted from collected data and use it to decipher customer behavior; that is, their practices, preferences, habits, needs, wants and more. The company can then leverage this data to offer personalized product recommendations, such as insurance premiums, saving plans, travel destinations, etc.
For example, an insurance company can have users install apps on their phones that collect data on distance traveled, car speed, etc., and optimize their car’s premium based on driving behavior.
Timely Improvement of Products and Customer Services
IoB also makes studying how customers interact with specific services or products easy. This saves companies from time-consuming surveys that are used to determine consumer preferences. The collected data is analyzed to identify pain points and issues of concern. The company can then address the issues before they become significant problems, such as by improving on products and services. This is an excellent way to build trust and confidence in a brand, leading to customer retention.
Behavioral Retargeting
Since companies can access customer preferences, recent activities, likes, dislikes, and location data, they can send real-time notifications to customers about discounts and new offers in stores nearby. They also can track loyal customers and offer them rewards. This kind of retargeting will make customers feel like a business values them and caters to their interests.
Develop a Tailored Marketing Strategy
Insights from IoB data can help tailor marketing strategies to individual customers. For instance, a retail store can offer products or services based on the mood, age or gender of a customer; thereby providing a satisfying experience that will lead to a stronger emotional connection with the brand.
Key Challenges that must be Addressed for the Success of IoB
Despite the opportunities IoB offers, companies must be aware of some key challenges to fully realize its benefits.
Privacy Concerns – Although personalization will make consumer lives easier, there is a concern about privacy. Companies must implement strong cybersecurity policies and measures to ensure that customer information is used only for that which a customer has given consent.
Convincing Users to Share Personal Data – People might not be comfortable sharing their personal data.
Laws and Regulations – Strict regulations around collecting and using personal data, such as the General Data Protection Regulation (GDPR), require companies to comply in order to avoid fines and legal issues.
Cybersecurity – As reliance on technology rises, so do cyberattacks. Cybercriminals may access sensitive data on consumer behavior, making consumers susceptible to online scamming and identity theft, among other threats.
Conclusion
Leveraging IoB can provide businesses with a competitive edge and drive revenue growth. Companies seeking continuous success should consider placing IoB at the center of business innovation to create personalized customer experiences. At the same time, they must also examine any challenges that might reduce the effectiveness of IoB.
Leveraging the Internet of Behavior (IoB) to Boost Customer Loyalty
March 1, 2023 · Blog, Uncategorized, What's New in Technology
⏱ 4 min read
Customer loyalty is critical to any successful business strategy in today’s digital age. With emerging technologies such as the internet of things (IoT), companies are now leveraging a new approach called the internet of behavior (IoB) to gain deeper insights into their customers’ behavior and preferences.
What is IoB?
The internet of behavior exists because of the internet of things. IoT is the interconnection of physical digital objects that gather and exchange information over the internet. On the other hand, IoB makes sense of the collected data from various sources, including wearable devices, digital household devices, human online activity and social media.
The acronym internet of behavior (IoB) was coined by Gartner, a tech research firm, as identified among the top 10 trends in their strategic technology report for 2021. However, the concept of using data to influence customer behavior was developed in 2012 by Göte Nyman, a psychology professor at the University of Helsinki, long before the internet of things took hold.
Gartner defines IoB as an extension of the internet of things, focusing on capturing, processing and analyzing the “digital dust” of people’s daily lives.
Simply put, IoB interconnects IoT, consumer psychology and data analytics. The data is analyzed in terms of behavioral psychology to capture patterns that marketing and sales teams can use to influence customer behavior.
How IoB can Influence Customer Loyalty
Aside from products and services, customer experience has become a significant factor in business success. By understanding customer behavior, businesses can leverage IoB data to influence customer loyalty in various ways.
To take advantage of IoB, companies study insights extracted from collected data and use it to decipher customer behavior; that is, their practices, preferences, habits, needs, wants and more. The company can then leverage this data to offer personalized product recommendations, such as insurance premiums, saving plans, travel destinations, etc.
For example, an insurance company can have users install apps on their phones that collect data on distance traveled, car speed, etc., and optimize their car’s premium based on driving behavior.
Timely Improvement of Products and Customer Services
IoB also makes studying how customers interact with specific services or products easy. This saves companies from time-consuming surveys that are used to determine consumer preferences. The collected data is analyzed to identify pain points and issues of concern. The company can then address the issues before they become significant problems, such as by improving on products and services. This is an excellent way to build trust and confidence in a brand, leading to customer retention.
Behavioral Retargeting
Since companies can access customer preferences, recent activities, likes, dislikes, and location data, they can send real-time notifications to customers about discounts and new offers in stores nearby. They also can track loyal customers and offer them rewards. This kind of retargeting will make customers feel like a business values them and caters to their interests.
Develop a Tailored Marketing Strategy
Insights from IoB data can help tailor marketing strategies to individual customers. For instance, a retail store can offer products or services based on the mood, age or gender of a customer; thereby providing a satisfying experience that will lead to a stronger emotional connection with the brand.
Key Challenges that must be Addressed for the Success of IoB
Despite the opportunities IoB offers, companies must be aware of some key challenges to fully realize its benefits.
Privacy Concerns – Although personalization will make consumer lives easier, there is a concern about privacy. Companies must implement strong cybersecurity policies and measures to ensure that customer information is used only for that which a customer has given consent.
Convincing Users to Share Personal Data – People might not be comfortable sharing their personal data.
Laws and Regulations – Strict regulations around collecting and using personal data, such as the General Data Protection Regulation (GDPR), require companies to comply in order to avoid fines and legal issues.
Cybersecurity – As reliance on technology rises, so do cyberattacks. Cybercriminals may access sensitive data on consumer behavior, making consumers susceptible to online scamming and identity theft, among other threats.
Conclusion
Leveraging IoB can provide businesses with a competitive edge and drive revenue growth. Companies seeking continuous success should consider placing IoB at the center of business innovation to create personalized customer experiences. At the same time, they must also examine any challenges that might reduce the effectiveness of IoB.
Disclaimer
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact a professional regarding the topics in these articles. The images linked to these articles are protected by copyright and should not be copied for any reason.
Investing in Main Street Act of 2023 (HR 400) – Introduced by Rep. Judy Chu (D-CA) on Jan.20, this bill would permit certain financial institutions to increase investments in small business investment companies (SBICs). The current cap is 5 percent; if passed, the amount would rise to up to 15 percent of their capital and surplus. The bill passed in the House on Jan.25 and is now under consideration in the Senate.
To terminate the requirement imposed by the Director of the Centers for Disease Control and Prevention for proof of COVID-19 vaccination for foreign travelers and for other purposes (HR 185) – This bill would nullify the standing CDC order that requires non-U.S. citizens who are not immigrants to be fully vaccinated against COVID-19 (or otherwise prove adherence to public health measures to prevent contagion)for entry into the United States by air travel. The bill also would nullify both successor and subsequent orders that would require proof of a COVID-19 vaccination as a condition of entry and prohibit the use of federal funds to enforce such a requirement. However, the bill carves out exceptions for certain individuals traveling from China to the United States. The bill was introduced on Jan. 9 by Rep. Thomas Massie (R-KY). It passed in the House on Feb. 8 and is currently under consideration in the Senate.
Freedom for Health Care Workers Act (HR 497) – The passage of this bill would eliminate the current COVID-19 vaccine mandate for healthcare providers working in certain federal healthcare programs. The bill was introduced by Rep. Jeff Duncan (R-SC) on Jan. 25 and passed in the House on Jan. 31. It is currently awaiting review in the Senate.
To nullify the modifications made by the Food and Drug Administration in January 2023 to the risk evaluation and mitigation strategy for the abortion pill mifepristone and for other purposes (HR 383) – This bill would nullify the FDA’s new rule allowing a pharmacy to dispense mifepristone, as well as ban the pill from being offered by mail. Medication abortion is now the most commonly used abortion method in the United States. Under the current guidelines, pharmacies may prescribe mifepristone in person to patients, essentially permitting it to be disseminated at the same time with misoprostol. This two-pill combination is taken in sequence to induce an abortion at home. The bill to ban this access was introduced on Jan. 17 by Rep. Diana Harshbarger (R-TN) but has yet to be assigned to a committee for review.
To ensure the privacy of pregnancy termination or loss information under the HIPAA privacy regulations and the HITECH Act (HR 459) – This legislation was introduced in the House by Rep. Anna Eshoo (D-CA) on Jan. 24. It would ban doctors from revealing a patient’s abortion information without consent, even under a court order or subpoena. Presently, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) restricts doctors, psychologists, pharmacies, hospitals, etc., from revealing a patient’s protected health information – unless compelled to do so by law. This bill would make it illegal for a medical professional to reveal a patient’s abortion information without the patient’s consent, superseding even a court order or subpoena. The bill is currently in the House awaiting a potential vote by the Energy and Commerce Committee.
Prescription Pricing for the People Act of 2023 (S 113) – This bill would authorize the Federal Trade Commission to study the role of intermediaries in the pharmaceutical supply chain and report on anti-competitive practices and other trends that impact how prescription medications are priced. In an effort to increase transparency, the FTC also would provide recommendations to Congress for potential legislative action. The bill was introduced on Jan. 26 by Sen. Chuck Grassley (R-IA) and is currently being considered in the Senate.
Increasing Small Business Investments, Relaxing COVID Vaccination Requirements and Generating More Challenges to Abortion Access
March 1, 2023 · Blog, Congress at Work, Uncategorized
⏱ 4 min read
Investing in Main Street Act of 2023 (HR 400) – Introduced by Rep. Judy Chu (D-CA) on Jan.20, this bill would permit certain financial institutions to increase investments in small business investment companies (SBICs). The current cap is 5 percent; if passed, the amount would rise to up to 15 percent of their capital and surplus. The bill passed in the House on Jan.25 and is now under consideration in the Senate.
To terminate the requirement imposed by the Director of the Centers for Disease Control and Prevention for proof of COVID-19 vaccination for foreign travelers and for other purposes (HR 185) – This bill would nullify the standing CDC order that requires non-U.S. citizens who are not immigrants to be fully vaccinated against COVID-19 (or otherwise prove adherence to public health measures to prevent contagion)for entry into the United States by air travel. The bill also would nullify both successor and subsequent orders that would require proof of a COVID-19 vaccination as a condition of entry and prohibit the use of federal funds to enforce such a requirement. However, the bill carves out exceptions for certain individuals traveling from China to the United States. The bill was introduced on Jan. 9 by Rep. Thomas Massie (R-KY). It passed in the House on Feb. 8 and is currently under consideration in the Senate.
Freedom for Health Care Workers Act (HR 497) – The passage of this bill would eliminate the current COVID-19 vaccine mandate for healthcare providers working in certain federal healthcare programs. The bill was introduced by Rep. Jeff Duncan (R-SC) on Jan. 25 and passed in the House on Jan. 31. It is currently awaiting review in the Senate.
To nullify the modifications made by the Food and Drug Administration in January 2023 to the risk evaluation and mitigation strategy for the abortion pill mifepristone and for other purposes (HR 383) – This bill would nullify the FDA’s new rule allowing a pharmacy to dispense mifepristone, as well as ban the pill from being offered by mail. Medication abortion is now the most commonly used abortion method in the United States. Under the current guidelines, pharmacies may prescribe mifepristone in person to patients, essentially permitting it to be disseminated at the same time with misoprostol. This two-pill combination is taken in sequence to induce an abortion at home. The bill to ban this access was introduced on Jan. 17 by Rep. Diana Harshbarger (R-TN) but has yet to be assigned to a committee for review.
To ensure the privacy of pregnancy termination or loss information under the HIPAA privacy regulations and the HITECH Act (HR 459) – This legislation was introduced in the House by Rep. Anna Eshoo (D-CA) on Jan. 24. It would ban doctors from revealing a patient’s abortion information without consent, even under a court order or subpoena. Presently, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) restricts doctors, psychologists, pharmacies, hospitals, etc., from revealing a patient’s protected health information – unless compelled to do so by law. This bill would make it illegal for a medical professional to reveal a patient’s abortion information without the patient’s consent, superseding even a court order or subpoena. The bill is currently in the House awaiting a potential vote by the Energy and Commerce Committee.
Prescription Pricing for the People Act of 2023 (S 113) – This bill would authorize the Federal Trade Commission to study the role of intermediaries in the pharmaceutical supply chain and report on anti-competitive practices and other trends that impact how prescription medications are priced. In an effort to increase transparency, the FTC also would provide recommendations to Congress for potential legislative action. The bill was introduced on Jan. 26 by Sen. Chuck Grassley (R-IA) and is currently being considered in the Senate.
Disclaimer
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact a professional regarding the topics in these articles. The images linked to these articles are protected by copyright and should not be copied for any reason.
Apart from the spike in inflation, 2023 ended the year with a relatively strong economy, boasting an unemployment rate of 3.5 percent (below the market forecast of 3.7 percent) with increases in wages, corporate profits, and economic growth over the past two quarters. Despite the positive data, a slate of companies, including Microsoft, Google, Amazon, Goldman Sachs, and Bed Bath & Beyond, have all announced significant layoffs planned for this year.
Whether the result of a layoff, a new job, or retirement, the reality is that over the course of a career, most people will change jobs several times. The good news is that 401(k) plan assets are portable – meaning you can take them with you. However, it is important to be aware of all your options so that you choose the most advantageous one each time you change employers.
You Don’t Have to do Anything Right Away
The first thing to note is that the income deferrals you contributed to your employer’s retirement plan are yours to keep. However, an employer match may be subject to a vesting schedule. If you do not work at the company long enough to satisfy the vesting schedule, you might lose all or a portion of the unvested assets in your account.
It is not necessary to roll over your 401(k) assets right away; in many cases, you can leave them where they are indefinitely. However, you will no longer be able to make contributions to the plan, receive matching funds, or tap that money for a loan. If the plan has a wide range of investment options, low fees, and expenses and has performed well, then leaving assets where they are may be your best choice.
On the other hand, you should investigate to ensure your plan does not change once you no longer work for a former employer, as some plans charge higher fees for inactive employees. Also, some employers may require you to cash out of your account balance – usually if it is below $1,000. If your balance is above $1,000, that employer must offer you the option to roll those assets into a personal IRA.
Take the Money
If you opt to withdraw the cash value of your account, you will be subject to an immediate tax impact. Your company may cut you a check for the amount withdrawn, but it is required to withhold 20 percent of the amount to prepay the tax you’ll owe. If you have not yet reached age 59½, the IRA will classify the distribution as an early withdrawal. This means you might owe a 10 percent penalty in addition to the federal tax withholding. The balance also may be subject to state and local taxes. All told, you could lose up to 50 percent of the account value if you take an early distribution.
For young adults in particular, it can be tempting to withdraw their 401(k) balance when they leave an employer. They may not have acquired much in assets, not met vesting requirements for the employer match, and figure they have more need for the money now than in 50 years when they retire. However, bear in mind that investments made early as an adult often purchase good, dependable stocks at low prices, with decades for those stocks to appreciate. Holding onto those assets over the long term allows for maximum growth opportunity, whereas withdrawing them means you’ll have to start all over again.
Roll Over Assets to Your New Employer’s 401(k)
Some employer plans will accept transfers from a former retirement plan, but not all of them do. You will have to inquire. If this is an option, recognize that there is no need to roll over right away. You may want to work there for awhile to ensure you’re happy, the company is viable, and you plan to stay there a while. Furthermore, you may have to wait until the next enrollment period to request a rollover, and some employers may require that you work a specific period of time (e.g., one full year) before you can transfer old 401(k) assets to your new plan.
Open a Personal IRA
A third option is to transfer your old employer’s 401(k) assets to a personal individual retirement account (IRA) that you open through a brokerage of your choice. The new brokerage custodian will give you the forms needed to request the formal rollover, and your former 401(k) plan administrator might have forms to complete as well. It is best to have the two custodians conduct the transfer directly so that you never take possession of the funds yourself, which could result in tax penalties if not conducted correctly.
You’ll need to select new investment options (e.g., mutual funds, exchange-traded funds, individual stocks or bonds) for the IRA, and be sure to compare its fees with your old account. By rolling over to an IRA that you manage yourself, you will have a wider range of investment options and can shop for plans with lower fees.
Bear in mind that, moving forward, any additional contributions you make to this IRA will be subject to lower annual contribution limits (in 2023: $6,500 if under age 50; $7,500 for 50 and older) than 401(k) plans as well as the income limitations applicable to a Roth IRA (2023: less than $153,000 Modified Adjusted Gross Income (MAGI) if you are single; less than $228,000 if you’re married and file jointly).
There are three IRA rollover options for 401(k) plan assets:
Roll over to a new or existing traditional IRA – No taxes are due on the assets you transfer, and earnings continue to accumulate tax deferred until withdrawn. It’s best to directly roll-over the funds from one custodian to another.
Roll over to a new or existing Roth IRA – This option requires that you pay taxes on the rollover amount in the tax filing year they are transferred. You may use money from the 401(k) plan or pay the tax separately using other assets (the latter is preferable so that your equity continues to appreciate). Once the IRA has been open for at least five years, and you are at least age 59½, contributions and earnings can be withdrawn free of all taxes and penalties. Furthermore, unlike the traditional IRA, you are not required to take minimum distributions (RMDs) from a Roth.
Roll over a Roth 401(k) to a new or existing Roth IRA – No taxes are due when the money is transferred, and new earnings accumulate tax deferred. Contributions and earnings are eligible for tax-free withdrawals once the IRA has been open at least five years and you are at least age 59½.
Do Something
Leaving your 401(k) with a former employer is a perfectly acceptable option, but you should consider consolidating your 401(k) plans at some point. More and more people are working for multiple employers throughout their careers, and they may lose track of where they hold 401(k) assets. In fact, at the end of 2021, there was a nationwide total of $1.35 trillion sitting in forgotten 401(k) plans.
Don’t let that happen to you.
401(k) Options After You Leave an Employer
February 1, 2023 · Blog, Financial Planning, Uncategorized
⏱ 6 min read
Apart from the spike in inflation, 2023 ended the year with a relatively strong economy, boasting an unemployment rate of 3.5 percent (below the market forecast of 3.7 percent) with increases in wages, corporate profits, and economic growth over the past two quarters. Despite the positive data, a slate of companies, including Microsoft, Google, Amazon, Goldman Sachs, and Bed Bath & Beyond, have all announced significant layoffs planned for this year.
Whether the result of a layoff, a new job, or retirement, the reality is that over the course of a career, most people will change jobs several times. The good news is that 401(k) plan assets are portable – meaning you can take them with you. However, it is important to be aware of all your options so that you choose the most advantageous one each time you change employers.
You Don’t Have to do Anything Right Away
The first thing to note is that the income deferrals you contributed to your employer’s retirement plan are yours to keep. However, an employer match may be subject to a vesting schedule. If you do not work at the company long enough to satisfy the vesting schedule, you might lose all or a portion of the unvested assets in your account.
It is not necessary to roll over your 401(k) assets right away; in many cases, you can leave them where they are indefinitely. However, you will no longer be able to make contributions to the plan, receive matching funds, or tap that money for a loan. If the plan has a wide range of investment options, low fees, and expenses and has performed well, then leaving assets where they are may be your best choice.
On the other hand, you should investigate to ensure your plan does not change once you no longer work for a former employer, as some plans charge higher fees for inactive employees. Also, some employers may require you to cash out of your account balance – usually if it is below $1,000. If your balance is above $1,000, that employer must offer you the option to roll those assets into a personal IRA.
Take the Money
If you opt to withdraw the cash value of your account, you will be subject to an immediate tax impact. Your company may cut you a check for the amount withdrawn, but it is required to withhold 20 percent of the amount to prepay the tax you’ll owe. If you have not yet reached age 59½, the IRA will classify the distribution as an early withdrawal. This means you might owe a 10 percent penalty in addition to the federal tax withholding. The balance also may be subject to state and local taxes. All told, you could lose up to 50 percent of the account value if you take an early distribution.
For young adults in particular, it can be tempting to withdraw their 401(k) balance when they leave an employer. They may not have acquired much in assets, not met vesting requirements for the employer match, and figure they have more need for the money now than in 50 years when they retire. However, bear in mind that investments made early as an adult often purchase good, dependable stocks at low prices, with decades for those stocks to appreciate. Holding onto those assets over the long term allows for maximum growth opportunity, whereas withdrawing them means you’ll have to start all over again.
Roll Over Assets to Your New Employer’s 401(k)
Some employer plans will accept transfers from a former retirement plan, but not all of them do. You will have to inquire. If this is an option, recognize that there is no need to roll over right away. You may want to work there for awhile to ensure you’re happy, the company is viable, and you plan to stay there a while. Furthermore, you may have to wait until the next enrollment period to request a rollover, and some employers may require that you work a specific period of time (e.g., one full year) before you can transfer old 401(k) assets to your new plan.
Open a Personal IRA
A third option is to transfer your old employer’s 401(k) assets to a personal individual retirement account (IRA) that you open through a brokerage of your choice. The new brokerage custodian will give you the forms needed to request the formal rollover, and your former 401(k) plan administrator might have forms to complete as well. It is best to have the two custodians conduct the transfer directly so that you never take possession of the funds yourself, which could result in tax penalties if not conducted correctly.
You’ll need to select new investment options (e.g., mutual funds, exchange-traded funds, individual stocks or bonds) for the IRA, and be sure to compare its fees with your old account. By rolling over to an IRA that you manage yourself, you will have a wider range of investment options and can shop for plans with lower fees.
Bear in mind that, moving forward, any additional contributions you make to this IRA will be subject to lower annual contribution limits (in 2023: $6,500 if under age 50; $7,500 for 50 and older) than 401(k) plans as well as the income limitations applicable to a Roth IRA (2023: less than $153,000 Modified Adjusted Gross Income (MAGI) if you are single; less than $228,000 if you’re married and file jointly).
There are three IRA rollover options for 401(k) plan assets:
Roll over to a new or existing traditional IRA – No taxes are due on the assets you transfer, and earnings continue to accumulate tax deferred until withdrawn. It’s best to directly roll-over the funds from one custodian to another.
Roll over to a new or existing Roth IRA – This option requires that you pay taxes on the rollover amount in the tax filing year they are transferred. You may use money from the 401(k) plan or pay the tax separately using other assets (the latter is preferable so that your equity continues to appreciate). Once the IRA has been open for at least five years, and you are at least age 59½, contributions and earnings can be withdrawn free of all taxes and penalties. Furthermore, unlike the traditional IRA, you are not required to take minimum distributions (RMDs) from a Roth.
Roll over a Roth 401(k) to a new or existing Roth IRA – No taxes are due when the money is transferred, and new earnings accumulate tax deferred. Contributions and earnings are eligible for tax-free withdrawals once the IRA has been open at least five years and you are at least age 59½.
Do Something
Leaving your 401(k) with a former employer is a perfectly acceptable option, but you should consider consolidating your 401(k) plans at some point. More and more people are working for multiple employers throughout their careers, and they may lose track of where they hold 401(k) assets. In fact, at the end of 2021, there was a nationwide total of $1.35 trillion sitting in forgotten 401(k) plans.
Don’t let that happen to you.
Disclaimer
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact a professional regarding the topics in these articles. The images linked to these articles are protected by copyright and should not be copied for any reason.
There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.
A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receive remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.
The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:
More than 200 transactions occurring annually
More than $20,000 in sales annually
Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.
When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.
Depending on the outcome of the sale (a gain or loss), the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.
There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the intent of the 1099-K Form is to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.), such transactions are excluded because they qualify as “personal transactions” under IRS guidance.
With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.
Understanding the Latest Modifications to Form 1099-K Reporting Requirements
February 1, 2023 · Accounting News, Blog, Uncategorized
⏱ 3 min read
There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.
A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receive remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.
The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:
More than 200 transactions occurring annually
More than $20,000 in sales annually
Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.
When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.
Depending on the outcome of the sale (a gain or loss), the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.
There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the intent of the 1099-K Form is to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.), such transactions are excluded because they qualify as “personal transactions” under IRS guidance.
With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.
Disclaimer
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact a professional regarding the topics in these articles. The images linked to these articles are protected by copyright and should not be copied for any reason.
The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, otherwise known as SECURE 2.0, is a piece of legislation that focuses on how employers and their employees are able to save for retirement and how it impacts their bottom lines.
Customer loyalty is critical to any successful business strategy in today’s digital age. With emerging technologies such as the internet of things (IoT), companies are now leveraging a new approach called the internet of behavior (IoB) to gain deeper insights into their customers’ behavior and preferences.
Investing in Main Street Act of 2023 (HR 400) – Introduced by Rep. Judy Chu (D-CA) on Jan.20, this bill would permit certain financial institutions to increase investments in small business investment companies (SBICs). The current cap is 5 percent; if passed, the amount would rise to up to 15 percent of their capital and surplus. The bill passed in the House on Jan.25 and is now under consideration in the Senate.
Apart from the spike in inflation, 2023 ended the year with a relatively strong economy, boasting an unemployment rate of 3.5 percent (below the market forecast of 3.7 percent) with increases in wages, corporate profits, and economic growth over the past two quarters. Despite the positive data, a slate of companies, including Microsoft, Google, Amazon, Goldman Sachs, and Bed Bath & Beyond, have all announced significant layoffs planned for this year.
There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.