Bottom Line Up Front

• You can contribute to both a SIMPLE IRA and a 401(k) in the same year, but your employee salary-deferral limit is shared across both plans — for 2026, that combined cap is $24,500, not two separate maximums. 
• Business owners cannot simply run both plans side by side — to switch from a SIMPLE IRA to a 401(k), the SIMPLE IRA must be terminated, either at year-end or mid-year under SECURE 2.0’s safe harbor 401(k) replacement rules. 
• A mid-year switch comes with a prorated deferral limit, meaning if you’ve already contributed heavily to the SIMPLE IRA, your remaining 401(k) employee deferral room for that year will be reduced — though employer contributions can help close the gap toward the $72,000 annual additions limit. 

Yes, you can contribute to a SIMPLE IRA and a 401(k) in the same year if you are eligible for both plans, such as when you change jobs, work for two unrelated employers, or have a job plus self-employment income. But there’s a catch: your employee salary-deferral limit is shared across both plans. You do not get to contribute to the full SIMPLE IRA employee limit and the full 401(k) employee limit separately. 

For 2026, the general employee deferral limit for a traditional or safe harbor 401(k) is $24,500, and the general SIMPLE IRA salary-reduction limit is $17,000. The IRS states that if you participate in a SIMPLE IRA and another employer plan in the same year, the total salary-reduction contributions you make across all such plans are limited to $24,500 for 2026, before any applicable catch-up contributions. 

Can a Business Owner Switch from a SIMPLE IRA to a 401(k) and Contribute in the Same Year?

For many small business owners, a SIMPLE IRA is a good starter retirement plan. It is relatively easy to set up, inexpensive to operate, and generally does not require the employer to file an annual Form 5500. But once your business is profitable enough that you want to contribute much more for yourself, the SIMPLE IRA can start to feel limiting. The 401(k), especially when paired with employer profit-sharing contributions, can offer a much higher ceiling. 

For 2026, the annual 401(k) employee elective deferral limit is $24,500, while the total annual additions limit for a 401(k) or profit-sharing plan is $72,000, not counting catch-up contributions. By comparison, the general SIMPLE IRA employee salary-reduction limit is $17,000 for 2026, with required employer contribution typically limited to a 3% match or a 2% nonelective contribution formula. 

So, can you contribute to a SIMPLE IRA and a 401(k) in the same year if you own the business  and want to switch plans? The answer is: sometimes, but not by simply running both plans side by side. 

The key point to make the switch from a SIMPLE IRA to a 401(k) is that the 401(k) must replace the SIMPLE IRA, you cannot simply add a 401(k) on top of an existing SIMPLE IRA. 

How Do You Switch from a SIMPLE IRA to a 401(k)? 

There are two practical ways to move from a SIMPLE IRA to a 401(k): 

The first is the clean year-end switch. You discontinue the SIMPLE IRA effective January 1 and start the 401(k) for the new plan year. The IRS says that, for a standard SIMPLE IRA termination, you notify employees before November 2 that the SIMPLE IRA will be discontinued effective the following January 1, notify the financial institution and payroll provider, and keep records of your actions. 

But let’s say you add a few big customers, and you want to start getting the bigger tax deduction this year. The second option is a mid-year replacement. Under SECURE 2.0 for plan years beginning after 2023, an employer can terminate a SIMPLE IRA during the year if it establishes and maintains a safe harbor 401(k) to replace it – it will require a 30 day notice vs the traditional 60 day notice for a January 1st plan change. In that case, the safe harbor 401(k) is treated as an exception to the normal rule that prevents an employer from maintaining both a SIMPLE IRA and another plan in the same calendar year. 

For a business owner whose main goal is to contribute the full $72,000 between employee and employer contributions, the cleanest planning route is usually to terminate the SIMPLE IRA at year-end and start the 401(k) on January 1. For some it may be worth the extra effort to make the switch immediately and take advantage of the added contributions and tax deductions a 401(k) offers. 

Want to Upgrade Your SIMPLE IRA to a 401(k) Plan in 2026?

What Happens if You Switch from a SIMPLE IRA to a 401(k) Mid-Year?

A mid-year switch is possible, but it is not as simple as saying, “I contributed to the SIMPLE IRA for part of the year, now I’ll contribute the full 401(k) maximum.” 

When a SIMPLE IRA is replaced mid-year by a safe harbor 401(k), the IRS requires the employee deferral limit for the transition year to be calculated using a weighted formula. The formula prorates the SIMPLE IRA limit for the part of the year the SIMPLE IRA was in effect, prorates the 401(k) limit for the part of the year the safe harbor 401(k) was in effect, and then subtracts any SIMPLE IRA salary-reduction contributions already made that year.

For example, assume the SIMPLE IRA is in place from January 1 through June 30, 2026, and the safe harbor 401(k) starts July 1. Ignoring catch-up contributions, the weighted employee deferral limit would be approximately:

This creates a combined transition-year deferral limit of about $20,781, minus whatever you already deferred into the SIMPLE IRA.

If you had already deferred the full $17,000 into the SIMPLE IRA before the switch, your remaining employee deferral room for the 401(k) would be only about $3,781 in this example.

That does not necessarily mean the $72,000 goal is impossible, but it does mean the employee-deferral portion may be smaller, and more of the contribution would need to come from the employer side if allowed. In addition, a mid-year 401(k) can create short-plan-year or short-limitation-year issues, and the IRS notes that the Section 415 annual additions limit may need to be prorated in a short limitation year depending on how the plan is drafted.

Key Takeaways: Moving a SIMPLE IRA to a 401(k)

Switching from a SIMPLE IRA to a 401(k) can be an effective way for business owners to increase retirement contributions and potentially generate larger tax deductions. However, the transition must be handled carefully. In most cases, you cannot simply add a 401(k) on top of an existing SIMPLE IRA without first terminating or replacing the SIMPLE IRA according to IRS rules. 

While a 401(k) generally involves more administration and recordkeeping than a SIMPLE IRA, the increased contribution flexibility may make the additional complexity worthwhile. If you’re considering making the switch, it’s important to coordinate with your retirement plan advisor, TPA, payroll provider, and tax professional to ensure the transition is completed correctly and to maximize available contribution opportunities. 

Frequently Asked Questions

Can I max out both a SIMPLE IRA and a 401(k) in the same year?
No. The employee salary-deferral limit is generally shared across both plans, so you cannot contribute the full employee maximum to each separately.

Can I have a SIMPLE IRA and a 401(k) at the same time?
Generally, an employer cannot maintain both plans simultaneously unless a specific exception applies, such as the SECURE 2.0 mid-year replacement rules.

Is it worth switching from a SIMPLE IRA to a 401(k)?
For many growing businesses, a 401(k) provides significantly higher contribution opportunities and greater plan design flexibility, though it comes with additional administrative responsibilities.

The post Can I Contribute to a SIMPLE IRA and 401(k) in the Same Year? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Making contributions to your company’s 401(k) plan and then transferring the balance to a Roth 401(k) can allow you to increase contributions and help decrease your taxes.
• In 2026, a participant can contribute up to $24,500 from their pre-tax earnings and up to $47,500 after taxes into their 401(k) plan for a total of up to $72,000 (indexed) — not including catch-up contributions.
• The Mega Roth Backdoor IRA can be effective under a plan with ideal demographics and generous employer contributions to save more in a Roth IRA or Roth 401(k) than you would normally be able to.

You know that Mega Backdoor Roth thing your friend mentioned or that you stumbled across online? The one where you can make substantial contributions to your employer-sponsored 401(k) plan and then transfer them to a Roth 401(k) essentially saving you more on taxes in the long run. It may sound too good to be true, but it can work wonders for those who qualify and are in the right plan. It’s especially helpful if you’d typically be unable to contribute to a Roth account due to exceeding income limits. 

The Logistics

Under the IRS Code, 401(k) plans have a variety of contribution limits (excluding catch-up contributions):

• Employee Deferral – $24,500 for 2026 (indexed)
• Maximum Account Addition – $72,000 for 2026 (indexed)

Beyond that, 401(k) plans have various non-discrimination rules to ensure that the plan does not overly benefit highly compensated employees (“HCEs”). As it relates to this situation, the key testing is the ADP/ACP test.

As an example – we have a small company with two (2) owners and five (5) employees. The plan has reasonable participation with the employees on average contributing 7.14% of their pay and an employer match of 50% up to 6.0% of pay deferred yielding a Non-Highly Compensated Employee (“NHCE”) Average Contribution Percentage (“ACP”) of 2.40% for our NHCE group.

Based on these figures our owner’s contributions of 9.08% as employees and the employer match ACP of 3.00% allows them to easily pass our ADP & ACP tests.

Now, let’s add an after-tax feature to our plan. The owners see that they are far from their $72,000 total contribution limit and they have additional money they’d like to save for retirement. Owner 1 contributes the full $38,500 of that potential $38,500 available to maximize their account to the after-tax source in the plan. It’s important to remember that after-tax contributions are treated as employer contributions for purposes of the ACP test.

So, let’s see what happens:

The ADP test still passes easily as there was no change. However, they now fail the ACP test and the Owner 1 will be required to take a return of $22,575 in excess after-tax contributions – that’s not going to be a pleasant conversation for the TPA to have with them.

So, what’s the big deal? I put money in, and I get it back if we fail?

Well, let’s remember the objective here. You were putting money into the after-tax source with the goal of immediately converting it to a Roth either within the plan or via an in-service distribution to a Roth IRA. Well, that conversion/rollover would be ineligible and would need to be disgorged from their account – and you thought the 1st TPA conversation with Owner 1 was going to be rough!

Bottom Line

The Mega Backdoor Roth can and does work. But you need to have ideal demographics and likely a very generous employer contribution to the plan. If so, this can be a great benefit.

The short answer – talk to your TPA or consultant, evaluate the demographics and objectives, and do a preliminary ACP test in advance to see if it will work.

If you’d like to know more, you can reach out to us here. We’d be happy to help answer any questions you may have.

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As your business grows, upgrading your retirement plan from a SIMPLE IRA to a 401(k) can be a smart move. To make this change, ensure that all SIMPLE IRA participants receive notification of the termination by the deadline.

Previously, the notification deadline was November 2, as the IRS mandated a 60-day notice. However, with the implementation of SECURE 2.0 rules last year, you now only need to provide a written notice of the SIMPLE plan termination at least 30 days before the effective date.

How to Terminate Your SIMPLE IRA?

To terminate your SIMPLE IRA and upgrade to a 401(k) plan for 2026, you’ll need to follow a couple of steps. Here’s a general guideline on how to go about it:

1. Notify Employees: If you have employees who are participating in the SIMPLE IRA, you must inform them about your decision to terminate the plan. The IRS requires that you provide a 30-day notice before the end of the calendar year, which would be December 2nd, 2025.
2. Provide Notice to Financial Institution: Notify the financial institution that manages your SIMPLE IRA of your intention to terminate the plan at the end of the year. They will guide you through the process of closing the account.

If you’d like a SAMPLE termination notice to send to your employees, we have one available for download here.

Good to note: You do not need to notify the IRS that you’ve terminated your SIMPLE IRA plan.

You can work with your financial professional to determine the appropriate 401(k) Plan design & provider before year-end to maintain continuity without the constraint of an IRS deadline. Be aware, if you’d like it to be a “safe harbor” plan similar to the SIMPLE-IRA, that does have a December 1st notice date to employees.

As always, if you have questions on this or need more, please contact an Odyssey consultant.

The post Want to Upgrade Your SIMPLE IRA to a 401(k) Plan in 2026? The Deadline is Now appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Maximizing your contributions is key, with options like 401(k) plans, SIMPLE IRAs, and Cash Balance Plans providing tax advantages and flexibility.
• Flexibility and scalability are vital as your business grows, ensuring your retirement plan can adapt to workforce expansion and changing regulations.
• Regular reviews of your plan, compliance with legislation, and economic preparedness are necessary steps to secure a resilient and sustainable retirement plan for the future.

In today’s rapidly changing economic landscape, having a well-structured retirement plan isn’t just a perk for your employees – it’s a strategic investment in your company’s future. Small business owners, in particular, face unique challenges when offering retirement benefits, from maximizing tax advantages to navigating legislative changes. With evolving market conditions, new employee expectations, and shifting regulations, it’s never been more critical to ensure that your retirement is built to last.

Future-proofing your retirement plan means asking the tough questions now to avoid costly mistakes later. Is your plan flexible enough to grow with your business? Are you taking full advantage of tax incentives? Are you prepared for legislative changes that could impact compliance?

In this guide, we’ll review the key questions every business owner should consider to ensure your plan stands the test of time. Whether you’re already offering a plan or just starting, these insights will help secure both your business’s and your employees’ financial future.

Are You Maximizing Contribution Opportunities?

Each year, the IRS sets contribution limits for retirement plans like 401(k)s and profit-sharing plans. Are you contributing the maximum allowable amount? Missing these limits could mean leaving valuable tax-deferred growth on the table.

Business owners can often contribute more than employees through profit-sharing components or catch-up contributions if they’re 50 years or older, making this a prime area for tax savings and retirement growth.

• 401(k) Limits: The contribution limit in 2024 is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 years and above (higher catch-up contributions are coming in 2025 for those aged 60-63).
• SIMPLE IRA Limits: Employees can defer up to $16,000 of their salary pre-tax, with a $3,500 catch-up contribution for those aged 50 years and above.

2024 Cash Balance Plan Contribution Limits

Does Your Plan Offer Flexibility for Growth?

As your business grows, your retirement plan needs to grow with it. A common mistake is setting up a plan that works well for your current size but doesn’t leave room for expansion. Your retirement plan should be flexible enough to grow with your business and adapt to changes in your workforce, revenue, and long-term goals.

Ask yourself:

• Can your plan scale with your business? Whether you plan to double your workforce or add employees gradually, your plan should allow for increased contributions as profits rise or provide options to enhance benefits without straining cash flow.
• Is your plan portable and adaptable? Employees are more likely than ever to change jobs. Offering portability (e.g., easy rollovers) and flexible vesting schedules makes your plan more attractive while supporting long-term employee retention.

Are You Prepared for Legislative Changes?

Retirement plan regulations are always evolving. Recent updates, such as the SECURE Act and SECURE 2.0, have reshaped the retirement landscape with changes like higher contribution limits and expanded eligibility for part-time employees. Keeping your plan compliant is crucial to avoiding penalties and missing out on tax benefits.

Key steps to take:

• Regular plan reviews: Work with your administrator or actuary to ensure your plan aligns with the latest legislation, like changes to required minimum distributions (RMDs), or auto-enrollment provisions.
• Maximizing tax incentives: Under SECURE 2.0., small businesses starting new plans may qualify for increased tax credits, and features like automatic enrollment or matching or matching contributions can unlock additional savings.

Have You Accounted for Economic Uncertainty?

No one can predict the future, but a resilient retirement plan should be prepared to handle market fluctuations, recessions, inflation, and other economic challenges.

Is Your Investment Strategy Diversified?

A well-diversified investment strategy is key to weathering economic storms. Offering a mix of conservative and growth-oriented options like equity, bonds, and stable value funds helps manage risk. Diversification is also crucial for businesses – evaluating the plan’s risk exposure and using flexible matching formulas can maintain financial stability without overextending resources.

Can Your Plan Handle Economic Shocks?

Retirement plans must be built to withstand economic shifts. According to data from the Center for Retirement Research at Boston College, the average retirement age for men is 65, and for women, it’s 63. Assuming most people start saving at around age 25, that’s at least 35 years of managing retirement savings before tapping into them.

Think about the last 35 years: we’ve seen significant economic events, the most recent being the COVID-19 pandemic. This disruption underscored the importance of flexibility, as many companies had to adjust or pause distributions. Ensuring your plan includes loan or withdrawal options for employees facing financial hardship can offer them a safety net without compromising their long-term savings goals.

Do You Have the Right Team?

An experienced team of professionals – actuaries, recordkeepers, plan administrators, and financial advisors – is essential for designing and maintaining a successful retirement plan. They help ensure compliance, manage risk, and optimize contributions.

Key Roles:

Actuary: Modesl scenarios based on business growth and market conditions to keep the plan sustainable.

Recordkeeper: They provide the investment vehicles, track daily balances for each participant, and facilitate distributions.

Financial Advisor: Helps select investment options that align with employee goals and risk tolerance.

Plan Administrator: Whether in-house or a third-party administrator, they ensure the day-to-day operations run smoothly, from timely contributions to monitoring compliance and addressing regulatory changes.

Are You Conducting Regular Plan Reviews?

Regular annual or semi-annual reviews can ensure your plan remains compliant, competitive, and aligned with your long-term goals. These reviews should cover:

• Plan participation and employee engagement
• Investment performance and risk management
• Compliance with the latest legislation
• A cost-benefit analysis of employer contributions

By conducting regular reviews, you can spot areas for improvement and ensure your plan continues to meet both your financial and operational objections.

Future-Proofing Starts Now

A well-structured retirement plan can be one of the most valuable assets you offer your employees, helping attract and retain top talent. Future-proofing is an ongoing process that requires flexibility, expert guidance, and regular reviews. At Odyssey Advisors, we specialize in designing and administering customized retirement plans tailored to your company’s goals. Whether you’re starting a new plan or refining an existing one, we’re committed to being your partner for the long haul.

Ready to future-proof your retirement plan? Contact Odyssey Advisors today to schedule a consultation.

Disclaimer: None of the above information should be construed as financial, investment, or legal advice. Please consult your financial advisor or ERISA attorney to address your specific needs.

The post Is Your Retirement Plan Really Future-Proof? Critical Questions Every Business Owner Should Ask appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Roth plans allow you to make contributions after taxes have been taken out so you will receive tax-free withdrawals when you retire.
• A Roth IRA is held by an individual, has an income limit, makes early withdrawals easier, and the investment options are nearly unlimited.
• A Roth 401(k) is offered through an employer’s 401(k) plan, does not have an income limit, has higher contribution limits, and allows employers to make matching contributions.

By now, most of us know the importance of contributing to a retirement account. But with so many accounts available, the tasks of deciding where to start can be daunting. Roth retirement plans are a great way to contribute towards retirement if you expect to be earning more in retirement than you are currently – by paying taxes now, you can potentially pay a lower share of taxes than if you had to pay once you started withdrawing in retirement.

Did you know there are two different ways to contribute to a Roth account? Many employers have now started setting up a Roth 401(k) option within the 401(k) Plan, and you’re eligible to contribute to a Roth IRA if you make less than $144k annually (for single taxpayers). Curious to learn which one might be the right decision for you? Read on to find out the major differences between these two plans:

Roth IRA vs Roth 401(k) Comparison Chart

Looking to compare other plans? Check out how a 401(k) compares to a SIMPLE IRA plan.

Can I Have a Roth IRA and Roth 401(k)?

Yes, you can have both if your employer offers a Roth 401(k). If you are already taking full advantage of your Roth 401(k) and looking to increase your contributions, you can open a Roth IRA to supplement your current retirement plan. Make sure to look at the income limits and phase-out ranges based on your tax filing status to adjust your Roth IRA contributions accordingly.

Your tax advisor can also help you make the best decision based on your personal circumstances.

The Bottom Line

Both plans have their advantages and there’s no right answer to which plan is better than the other, but it is possible that one or both of these options are the right choice for you. By paying taxes before you contribute to your retirement account, you can potentially save significantly on your tax obligations later in life.

The post Roth IRA vs Roth 401(k): What You Need to Know appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Under current law, you’re required to start making withdrawals known as Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts by April 1st of the year after you turn 72, and each year thereafter by December 31st.
• You can calculate your RMD by dividing your account balance as of December 31st of the year prior by your distribution factor which can be found on the IRS’s uniform lifetime table
• Check out our infographic below to see if you’re subject to an RMD this year

You are required to make your first required withdrawal from your retirement accounts by April 1st of the year after you turn 72. After that, you must make one every year by December 31st. This is known as Required Minimum Distributions or RMDs.

What is a Required Minimum Distribution (RMD and when do I need to take one?

Traditional retirement accounts like a 401(k), IRA, or 403(b) are typically tax-deferred. That means that you don’t pay taxes on the money you contribute and you don’t pay taxes on the money while it sits in the account and grows.

Tax deferral, however, means just that. It only delays them until you start withdrawing the funds from your account.

So if you don’t need the additional income, why not just wait to withdraw as long as possible? Well, Uncle Same won’t let you delay them indefinitely because they’re going to want their tax revenue.

That’s where RMDs come into play. Under current law, you are required to start making withdrawals from your retirement accounts by April 1st of the year after you turn 72.

It used to be 70 ½ before the SECURE Act.

By the way, if you like rules, you’ll like this handy RMD decision tree to help you determine if you need to make a required minimum distribution this year or not.

If you’re planning to wait until April 1st of the following year, keep in mind that you will be required to take TWO RMDs in that year.

For example, if you turned 72 in December of 2021, but decide to wait and take your RMD in 2022 by April 1st, that RMD will count towards your 2021 requirement and you will still need to take an RMD for 2022 by December 31st, 2022.

RMDs apply to all tax-deferred accounts which include:

• 401(k) plans
• 403(b) plans
• 457(b) plans
• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• Profit-sharing plans

Roth IRAs are not subject to RMDs because the money was taxed before making a contribution to the account. Basically, Uncle Sam has no incentive to make you withdraw from a Roth IRA. That’s why you’ve probably heard of people rolling over their tax-deferred accounts into a Roth IRA, but we’ll touch on that more in a bit.

If you don’t need the income from your RMD to cover your retirement expenses, then an RMD may cause you more headaches. In addition to having to calculate them every year, they could result in excessive and unnecessary taxable income, and if you fail to withdraw the minimum amount, you’ll be facing a heft fine.

How to calculate your Required Minimum Distribution

Here is the formula to calculate your RMD:

You are required to use this calculation to determine your RMD for every retirement account you have that is subject to an RMD.

RMD Table for 2022

The IRS recently released new life expectancy tables for 2022. These tables are used to determine your RMD.

Quick note: If you’re making your first RMD by April 1st, 2022 because you turned 72 last year, you will need to use the previous RMD tables which I will link below.

There are two different sets of distribution factors (or RMD tables). If you’re single OR married and your spouse is not more than 10 years younger, you will use the uniform lifetime table.

If you are married AND your spouse is more than 10 years younger and the sole beneficiary on your account, then. you will need to use the joint-life & last survivor table.

I’m going to use the uniform lifetime table because it’s more widely used. If you have any questions regarding the joint-life & last survivor table we’d be happy to help.

After a gruesome deep-dive on Google, beyond the first page, and past the paid ads, I found a link to the updated uniform lifetime table for you. I also went ahead and put the table down below so you don’t have to scroll the 2 miles it takes to find it. Trust me, my fingers are still recovering.

Required Minimum Distribution (RMD) table for 2022

Here’s a link to the previous IRS uniform lifetime table as promised and to save you some PSFP (post-scroll finger pain), here’s a screenshot you can download.

So let’s look at an example: You just turned 75 and you have $150,000 in your IRA. Here’s what the calculation would look like.

If you have multiple retirement accounts, you will need to calculate each RMD separately for each account.

Don’t want to do the math by hand? Here’s an RMD calculator you can download.

How do RMDs work if I have multiple accounts?

As I mentioned above, if you have multiple retirement accounts, you will have to calculate the RMD for each account separately.

While you have to calculate each account’s RMD separately, in some cases, you can take the total RMD amount from one account. If you have separate IRA accounts, you can aggregate the total amount across accounts and take that amount from just one of your IRAs. This works with traditional, SEP, and SIMPLE IRAs.

For example, let’s say you have 3 IRAs and the RMD is $250 for each. You have the option to either take $250 from each account or take the total of $750 from one account or a combination.

However, RMD aggregation is not allowed across employer plans like 401(k)s and 403(b)s.

What if my spouse and I have separate retirement accounts? Can we combine our RMDs and take them from one account?

Short answer, no. If you’re married and have separate retirement accounts, you must take your RMDs separately from each other. Your RMDs cannot come solely from one spouse’s account.

What happens if I don’t take an RMD?

If you don’t take your RMD there is a penalty and a hefty one at that. I recommend setting an annual reminder just in case you don’t end up making a withdrawal or aren’t sure if you’ll meet the minimum requirement throughout the year.

The penalty for not making a required minimum distribution is 50% of the amount not taken on time.

For example, if your RMD is $500, but you only take $200, then you will owe Uncle Sam an additional fine of $150 (50% of the $300 you didn’t withdraw) in addition to the amount you still owe.

Make sure to follow the IRS guidelines and consult your tax advisor for more information.

Are RMDs taxable?

Yes, your RMD is considered part of your annual income. The total amount of your withdrawal (or RMD) is taxed as ordinary income based on your income tax rate. 

You can also have the tax withheld from your distribution instead of waiting until the end of the year. Check with your retirement account custodian because they should have a form or online process when you request your distribution that will ask if you’d like to withhold any amount to be sent to the IRS. 

You should also consult your tax advisor as they can put together some projections and give you a recommendation on how much to withhold. 

Remember when I mentioned that you have until the following year of your 72nd birthday to take your first RMD? Let’s go back to that quickly since we’re talking about taxes. 

If you take two RMDs your first year, it could push you into a higher tax bracket which would mean you’ll owe more in taxes that year. Depending on your circumstances, this could also make you subject to the Medicare high-income surcharge if your modified adjusted gross income is over $91,000 if you’re single or $182,000 if you’re married and filing jointly. And if you receive Social Security, a larger portion could be subject to taxation. 

At the risk of sounding like a broken record, reach out to your financial advisor and tax accountant BEFORE you turn 72 so they can help you determine the best plan of action based on your particular circumstance. 

It’s important to stay ahead of taxes when it comes to retirement. The sooner you start planning the better and here’s why…

RMD Creep

No, I’m not talking about the IRS coming after you for their tax money. I want to talk about why you should think about managing your RMD BEFORE you hit 72 years old. Like way before.  

There’s this thing called the “RMD Creep” and what I mean by this is that when you first turn 72 years old, your required minimum distribution will start out relatively small, but as you get older your RMD will likely grow exponentially. There are two factors that are at play here: 

1. As you age, the amount you’re required to withdraw also increases
2. And depending on your portfolio, the investments in your retirement accounts can continue to grow 

The most common mistake is that retirees will only look at their RMD in the first few years of the requirement and think that it will remain steady. However, the distribution factor changes as you get older. The older you get, the lower your distribution factor is which will increase your required minimum distribution. 

A higher RMD may force you into a higher tax bracket throughout retirement which can cost more than most retirees plan for. You can avoid some of these tax hits if you plan ahead and address these issues earlier on in retirement. That’s why it’s crucial to develop a tax strategy with your financial advisor and tax accountant in order to avoid costly tax surprises down the road. 

Here are 5 ways to use or minimize your Required Minimum Distributions

1. Manage Your Withdrawals before 72

When you turn 59 ½, you can start making withdrawals from your retirement accounts without a penalty. They are still taxed as regular income, but if you work with your financial advisor or accountant, they can help you figure out how much you can withdraw without moving into a higher tax bracket. 

Over time, the withdrawals will reduce the amount in your tax-deferred accounts which will result in a lower RMD when you reach 72. 

2. Convert funds from your Traditional IRAs and 401(k)s to a Roth IRA before 72

But once your money is in a Roth IRA, it can grow tax-free and withdrawals are nontaxable throughout the rest of your retirement. They also don’t come with required minimum distributions at age 72. 

3. Reinvest it

If you don’t have an option to reduce or avoid your RMD and you don’t need it to cover expenses, you can always reinvest it into a taxable brokerage account. 

If you make a conversion to a Roth IRA, you can reduce your RMD. If you do it before you turn 72, you can potentially eliminate your RMD requirement completely. Keep in mind, that the amount you convert from your tax-deferred account to a Roth IRA will be treated as income and taxed as such. This may cause your tax bracket for the year to increase. 

4. Give it to Charity 

Once you hit RMD age you can give up to $100,000 from your IRAs to an eligible charity, tax-free, every year. This is called Qualified Charitable Distributions (QCDs). A QCD isn’t taxable and will count towards satisfying your RMD for the year as long as the organization is considered qualified by the IRS. 

As long as the organization is qualified, you can have your RMD check issued directly to them. 

There are two rules when making a QCD: 

1. The transfer must be made to the charity directly from your IRA in order for it to not be included in your adjusted gross income.
2. You can’t claim the donation as a charitable deduction on your annual taxes.

You can use the IRS’s tool to see if a charity is qualified. Keep in mind, that this is only eligible for IRAs. 

5. Keep working

If you continue to work past the age of 72 and you don’t own 5% or more of the company, you can avoid taking RMDs from the retirement account sponsored by your current employer until you retire. 

Here’s the caveat, this only applies to your 401(k) at the company you’re working at. If you have another 401(k) or IRA from a previous employer, you’ll need to make an RMD on those accounts. Want a caveat to the caveat? If your current employer allows rollovers, you can transfer a 401(k) from a previous employer into your current account. This does not work with IRAs though. 

Don’t Forget

No matter when you decide to take your required minimum distribution and how you’re going to use it  – consulting your financial advisor and tax accountant well before the age of 72 will give you the best options based on your situation. Also, remember to take it by December 31st (please set a reminder!) so Uncle Sam doesn’t get half of what you should have withdrawn. 

Here at Odyssey, we’re always available to help if you have any questions. You can reach out to one of our retirement consultants here. 

The post Required Minimum Distributions (RMDs): When to Start Planning appeared first on Odyssey Advisors, Inc.

• Choosing a retirement plan for your client is one of the most important decisions you’ll help them make
• SIMPLE IRAs and 401(k)s are two tax-deferred retirement savings options ideal for small businesses
• Small business owners may find SIMPLE (Savings Incentive Match Plan for Employees) plans more attractive due to their simplified administrative requirements and lower cost

When your task is to find a retirement savings plan for your client’s small business, that’s a huge undertaking. It’s now your job to find your clients a retirement plan that will grow with them, help both your clients and their employees save and invest for their retirement, and ensure that the plan meets their employees’ needs, their business needs, and their personal needs.

Some plans are too costly for small businesses to maintain while others are too much of an administrative burden. So how do you find the perfect plan? First, you need a really good understanding of your client’s needs and where their business is at. Second, make sure to do your research on each and every plan that’s available to them.

Here are two plans that would be great for small businesses. Both a SIMPLE IRA and a SIMPLE 401(k) are two versions of popular retirement plan options designed specifically for small businesses with up to 100 employees. SIMPLE stands for Savings Incentives Match Plan for Employees.

What’s the Difference Between a SIMPLE IRA and a Traditional IRA?

Both the SIMPLE IRA and the traditional IRA are tax-deferred retirement savings plans. The SIMPLE IRA is designed for small businesses with under 100 employees. The main difference between the two is that SIMPLE IRAs have a higher employee contribution limit ($15,500 versus $6,500) and a higher catch-up contribution limit (an additional $3,500 versus $1,000) for employees over the age of 50.

SIMPLE IRAs also require mandatory contributions from the employer. A drawback that is unlike a traditional IRA, is that SIMPLE IRAs are not permitted to have any ROTH contributions. Both SIMPLE and traditional IRAs have early withdrawal penalties of 10%, however, SIMPLE IRAs have an extra 25% penalty if the withdrawal occurs within two years of the first deposit.

How does a SIMPLE 401(k) differ from a Traditional 401(k)?

SIMPLE 401(k) plans are very similar to a traditional 401(k) with a few minor differences. The biggest difference is that the employer is required to make a contribution under a SIMPLE 401(k) plan.

These plans are designed specifically for small businesses with under 100 employees. The lack of non-discrimination testing along with straightforward benefits reduces the amount of administration required with a traditional 401(k).

Employees are immediately 100% vested in a SIMPLE 401(k). In addition, if an employee is not eligible to participate in a SIMPLE 401(k) plan, other retirement plans may be offered to them. This feature is only available under a SIMPLE 401(k) plan.

SIMPLE 401(k) vs SIMPLE IRA: What’s the Difference?

The main benefit of a SIMPLE 401(k) compared to a SIMPLE IRA is the added flexibility associated with the plan. The ability to take out a loan is very beneficial for employees who may need to access their assets, but are not yet fully eligible to withdraw from their account without penalties. Another benefit of the SIMPLE 401(k) is the ability to sponsor other plans for employees who are not eligible for a SIMPLE 401(k). 

One drawback of a SIMPLE 401(k) in comparison to a SIMPLE IRA is the annual required form 5500 filing. The annual filing, along with keeping track of additional plans sponsored for non-eligible employees, can add strain on the administration. However, this is the tradeoff for a more flexible retirement savings plan. 

Traditional 401(k) compared to a SIMPLE IRA

Much like a SIMPLE 401(k), a traditional 401(k) offers even more flexibility in comparison to a SIMPLE IRA. The wide range of investment options allows you to customize their plans even more in order to meet your client’s needs. 

Another key difference is the ability of the employee to make Roth contributions with a traditional 401(k). This added flexibility comes with more administration requirements including non-discrimination testing. If your client has a small business with fewer than 100 employees, a traditional 401(k) may not be worth the added administrative work. If that is the case, then a SIMPLE IRA may be the best retirement plan option that allows employees to defer income with limited administration. 

Interested in comparing other plans? Check out how a Roth IRA compares to a Roth 401(k) here.

Bottom Line

Both SIMPLE 401(k)s and SIMPLE IRAs are solid retirement plan options for small business owners. What it ultimately comes down to is your client and their needs. Think about the participant’s ability to take out a loan against their funds, the withdrawal penalties, and eligibility requirements. In order to make the best decision for your client, their company, and their employees make sure to do ample research on each plan’s limits, requirements, and regulations.

Finding and managing a retirement plan is no small undertaking. It may be worthwhile to partner with a retirement plan third-party administrator who can custom design the optimal retirement plan for your clients and handle the day-to-day plan administration and compliance.

If you want our team to design and manage your clients’ retirement plans, fill out your info here.

The post 401(k) vs SIMPLE IRA: A Comparison appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• The maximum 401(k) contribution for 2022 is $20,500, a $1,000 boost from 2021’s contribution limit
• 401(k) catch-up contributions remain the same at $6,500
• Maximum contribution limits for defined benefit plans increased by $15,000

The IRS recently released the new plan limits for 2022 and employee 401(k) contribution limits increased to $20,500, a $1,000 boost from the current 2021 contribution limit of $19,500.

The tables below show key 2022 limits side-by-side with the current 2021 and previous 2022 limits. If you’re a financial advisor, these charts are a great way to start conversations with clients on plan redesign, tax-efficient combo plans, and talent retention & recruitment for the year ahead.

What are the new 401(k) plan limits for 2022?

What are the 2022 limits for non-401(k) related plans?

Download the full whitepaper: 401(k) Plan Limits & Non-401(k) Related Limits

Bonus whitepaper: 2022 HSA and HDHP Limits

What is the 2022 contribution limit for IRAs?

This limit did not change for 2022 so it is still $6,000. The catch-up contribution also remained the same at $1,000.

If you’d like a closer look at these and other retirement-related limits for 2022, please refer to the IRS Notice 2021-61, released November 4th, 2021.

Advisors, if you’re interested in a more in-depth retirement plan comparison chart or a free retirement plan review, drop us a quick note here and we’ll have one of our consultants reach out to you.

The post 401(k) and Retirement Plan Limits for 2022 appeared first on Odyssey Advisors, Inc.

KEY POINTS

• Neglecting to name a beneficiary means your assets may be designated to your estate and become subject to probate.
• Plan ahead to review your beneficiary information once per year and when major life changes happen.
• Avoid subjecting your loved ones to the probate process by designating both primary and alternative beneficiaries.

You may be naturally hesitant to think of your own demise and the issues associated with it. That’s okay, so are most of us. But what happens if you don’t name a beneficiary on your retirement accounts? Any remaining benefits may go to your estate. It’s important to review your beneficiaries regularly to avoid any complications. This includes IRAs, 401(k)s, defined benefit plans, and any life insurance plans you may have.

Here’s a quick tip: much like you check the smoke detector batteries when you change the clocks for daylight savings time, you should set an annual reminder to check your beneficiary designations as well.

So, What Happens if I Don’t Keep my Beneficiary Up-to-Date or Fail to Name One?

Any remaining benefits will be paid to the last beneficiary on file. If none exists, the terms of the plan document will set the precedence. While each plan document varies, the general order of default beneficiaries is your spouse, your children, and then your estate.

While you may think, “That’s fine. It will still go to my spouse.” Or “I don’t mind if it goes to my estate because whoever inherits my estate will receive it.” It’s not quite that simple. Your family members will need to go through probate court and deal with the legal ramifications (and administrative headaches) that go along with that.

When someone passes away, a majority of their assets are frozen until a will is located and then validated in court. Any debts still owed are then paid before their assets are released. This is known as the probate process. If you have a living beneficiary listed on your retirement plan, the assets in those accounts will not be subject to probate.

Another misconception is that if you don’t name a beneficiary on your retirement plan, it will default to who is listed in your will. In the case of retirement funds, not naming a beneficiary will leave the determination up to the plan document or default terms of the account.

What if I get Divorced and/or Remarry?

If you have named your now ex-spouse as your beneficiary, that beneficiary designation remains valid until you affirmatively change it. A divorce decree that splits your assets does NOT impact any beneficiary designation per the US Supreme Court decision in 2009. If you wish to make sure that your new spouse is your beneficiary, you must update that with the plan.

The Bottom Line

Death is an inevitable part of life. Planning ahead now can help secure your family’s future when that time comes and give you some much-needed peace of mind. Once you designate your beneficiaries, set a reminder annually to look over your beneficiary information. Also, remember to make changes as needed that may come from a major life change such as marriage, divorce, the birth of a child, or the passing of a spouse.

More on Retirement:

• SECURE Act 2.0 and What You Need to Know
• 5 Ways to Protect Your Retirement Account from Fraud & Identity Theft
• Required Minimum Distributions are Back. Tell a Friend.

Odyssey Advisors seeks to stay up-to-date with current & future plan design options as well as relevant IRS, DOL, and ERISA regulations to keep our clients and partners informed. If you have questions, please reach out to an Odyssey consultant for more information.

The post What Happens if I Don’t Name a Beneficiary? Who Gets My 401(k)? appeared first on Odyssey Advisors, Inc.

Asset protection is often associated with high-net-worth individuals, business owners, professionals such as doctors, surgeons, attorneys, and CPAs, as well as real estate investors and developers. The protection varies by plan type and may not be unlimited, but it can be a very valuable tool for high-net-worth individuals concerned about lawsuits or those who wish to have the peace of mind that comes from being protected.

What Types of Plans are Protected?

First, there are two federal laws that govern asset protection for qualified retirement accounts:

• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”)
• Employee Retirement Income Security Act of 1974 (“ERISA”)

IRAs, including Roth IRAs, are provided protection by the BAPCPA. The protection extends up to $1.0 million which is indexed for inflation. The amount is adjusted every three years and currently sits at $1,362,800 through April 1, 2022.

Retirement plans subject to ERISA are excluded from bankruptcy. This provides unlimited protection for qualified plans such as 401(k), 403(b), and Defined Benefit Pension Plans including Cash Balance Plans. Also, the amounts protected via these qualified plans are not included in the total available to the IRAs. Furthermore, if you roll over your 401(k) to an IRA, it will remain protected given that the source was a qualified plan which would have had unlimited protection.

What about Inherited IRAs?

In 2014, the U.S. Supreme Court ruled that inherited IRAs are not considered retirement assets and are thus not entitled to the same protection against bankruptcy at the federal level. This means they are subject to state laws and exemptions.

What about IRAs from a Qualified Domestic Relations Order (“QDRO”)?

When it comes to an IRA from a QDRO, there isn’t a U.S. Supreme Court ruling. Although, in 2018, the 8th Circuit Court of Appeals ruled that retirement assets received as part of a divorce proceeding are not entitled to bankruptcy protection. It is only one Circuit, but it provides some precedent for other Courts to follow in regard to QDRO retirement assets.

Closing

It is important to note that the bankruptcy provisions listed above only reflect Federal law and regulations. There are some states that offer extra protection. Also, even though assets in qualified plans and IRAs receive protection from creditors and bankruptcy, they are not protected from the IRS.

If you have any questions in regard to asset protection or would like to explore how to use qualified plans to achieve asset security, please reach out to your Odyssey consultant.

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