In late 2020 and 2021, Congress passed laws known together as the FAFSA Simplification Act, which are now in effect for financial aid applications for the 2024-25 school year. While Congress certainly achieved its goal of simplifying the application process, the new law also dictates a number of other changes to the FAFSA aid calculation, which will impact who is eligible for aid, how much they are eligible for, and what strategies might help applicants maximize financial aid during the college years.
Unlike the past few years in which the FAFSA application became available on October 1, the U.S. Department of Education promised that the new application would be available in December and then barely met its own deadline, releasing the new FAFSA with a “soft launch” on December 30th. Within a week, the online FAFSA form was available 24/7, and several million students have completed it since then. Students (and parents) can expect significant delays though in receiving financial aid packages from prospective colleges because of the lag in schools receiving financial aid data. Due to major processing delays (in addition to the later release date for the form), the Department of Education will not even begin sending students’ FAFSA data to colleges until mid-March. In future years, the start of FAFSA availability will revert to October 1st.
Fortunately, the new FAFSA should require much less time and effort than in previous years. The new application has less than 50 questions (compared to over 100 on the old form), much of the required tax and income information can (actually, must) be imported directly from the IRS, and students can list up to 20 colleges to receive the information from their online FAFSA form (as compared to only 10 under the old rules). Note, however, that to start the process in motion, the student as well as his/her spouse, parents, and/or step-parents, will need to request an “FSA ID,” unique credentials to log on to the FAFSA site and fill out their portion of the form, and it typically takes 3 business days to receive one’s FSA ID after submitting a request.
The new FAFSA calculation will revolve around a student’s SAI, or “Student Aid Index,” which is determined based on the income and assets of a student and any other contributors such as a spouse or parents. Like the “Expected Family Contribution” (EFC) under the old rules, the SAI will be deducted from a college’s cost of attendance to calculate a student’s financial need. As mentioned above, however, the SAI deviates from the EFC calculation in several ways, with certain groups of people benefiting from the changes while others are hurt by the changes.
Those hurt by the new SAI calculation:
Those benefiting from the new SAI calculation:
If you have questions about how the new FAFSA rules impact your eligibility for financial aid and/or whether you should make any financial changes in light of them, please do not hesitate to call or email us, and we would be happy to discuss in more detail.
At the end of 2022, Congress passed an omnibus spending package that included a number of significant changes to retirement plan rules, which became known as SECURE Act 2.0. We wrote a blog article at the time about the most relevant changes for our clients, including the jump to age 73 for starting Required Minimum Distributions from retirement accounts, which took effect in 2023. However, there were several provisions not projected to take effect until 2024. Most of those provisions are now in force, but, due to logistical complications, the IRS pushed the start date for one key change farther down the pike, so we will review the most relevant 2024 provisions and their current status here.
Surviving Spouse Can Take RMDs from an IRA According to the Age of Deceased Spouse? YES. Starting in 2024, a surviving spouse who inherits an IRA can now elect to be treated as the deceased spouse for the purposes of Required Minimum Distributions (RMDs) from that account. In other words, they do not have to start taking RMDs until the deceased spouse would have, and they can use the decedent’s age and the Uniform Lifetime table to calculate RMDs instead of using the Single Lifetime table for beneficiaries, which will result in a lower RMD amount for the surviving spouse. These changes will be particularly useful if the deceased spouse was younger than the surviving spouse.
“Extra” 529 Assets Can Be Rolled into a Roth IRA? YES! Starting in 2024, leftover 529 account assets that are no longer needed for education expenses can now be rolled over into a Roth IRA for the beneficiary as long as:
For clients in Virginia, the Virginia 529 website already has made adjustments in light of this change. To initiate a 529-to-Roth-IRA rollover, go to the “Manage My Accounts” tab and select “Roll Over Funds to Roth IRA.” Note that the beneficiary must already have a Roth IRA established at an outside brokerage prior to initiating the rollover, and you must certify that the rollover meets all of the criteria mentioned above.
Catch-Up Contributions for High Earners Must Be Directed to Roth Retirement Accounts? NOT YET. SECURE Act 2.0 mandated that, starting in 2024, any catch-up contributions to 401(k), 403(b), or 457(b) accounts for high income employees (earning wages over $145k from the same employer in the previous calendar year) would have to be made to the Roth version of their retirement plan. If a Roth version of the retirement plan was not available, then no one would be allowed to make any type of catch-up contributions to that plan. Given the amount of logistics required for employers to adapt to this change, the IRS decided in August to delay implementation of this provision until 2026.
Annual IRA Catch-Up Contribution and QCD Limit Now Indexed to Inflation? YES. The annual IRA catch-up contribution limit (for those over age 50 who are saving to IRA accounts) has remained fixed at $1,000 since 2006. Similarly, the amount that a taxpayer can give tax-free to charity directly from an IRA (through Qualified Charitable Distributions, or QCDs) has held steady at $100,000 since QCDs were first established in 2006. The SECURE Act 2.0 stipulated that starting in 2024, both of these limits would be indexed to inflation. This is evident in the new limit for QCDs ($105,000 for 2024), but inflation was so modest in 2023 that, based on the rules for calculating a catch-up contribution increase, no increase was required this year, and the catch-up amount remains at $1,000 for now.
Student Loan Repayments Can Be Eligible for 401(k) Match? YES. Beginning in 2024, employers can now match employees’ student loan payments with contributions to their retirement plan accounts. This could be a major boost for clients who want to be saving more for retirement but are saddled with significant student loans. Whether employers adopt such a program is at their discretion though, so it is not yet clear how widely this change will be adopted.
Roth 401(k) and Roth 403(b) Balances No Longer Subject to RMDs? YES. Beginning in 2024, balances in employer Roth plans, such as Roth 401k or Roth 403b accounts, are no longer subject to RMDs (similar to current rules for Roth IRAs).
Savers Can Tap Retirement Accounts or Emergency Savings Accounts for Minor Emergency Expenses without Penalty? YES. Retirement plan participants can now make one withdrawal per year (up to $1,000) from their retirement accounts for emergency expenses without an early withdrawal penalty (which is usually 10%). Such emergency withdrawals are still subject to ordinary income tax though. In addition, employers can now offer an emergency savings account linked to employees’ retirement accounts, which would allow up to four penalty-free withdrawals per year. Employees who earned less than $150k in 2023 can contribute up to $2,500 per year to this emergency savings account, if their employers choose to set up such an account.
If you have questions on how these provisions might impact you—or whether to take advantage of any new retirement plan features that your employer is offering—please do not hesitate to call or email us any time.
As we quickly approach the end of the year, some of you may be considering what you can do to lower your tax bill for 2023. One possibility is to increase your charitable giving, though your generosity will only impact your taxes if you itemize deductions on your tax return and/or can fulfill some of your required minimum distribution by giving directly from your IRA. Since the 2018 tax law significantly increased the standard deduction, many taxpayers may no longer itemize or may benefit from bunching charitable giving and just itemizing every other year. Another tax-efficient alternative for those over age 70 ½ is to make Qualified Charitable Distributions from their IRAs, as we discuss in more detail below.
Itemizing Deductions. Most taxpayers are aware that they have two options for deductions against their taxable income on their annual tax return—itemizing deductions (which includes a combination of state income and property taxes paid, mortgage interest paid, charitable giving, and possibly medical expenses) or taking the standard deduction. As we discussed back in 2017, the 2018 tax law doubled the standard deduction, so many Americans who previously itemized deductions began to take the standard deduction instead. (For 2023, the standard deduction is $13,850 for single filers and $27,700 for joint filers, so you will only choose to itemize deductions if they exceed these levels.) If you take the standard deduction, your charitable giving will typically not have any tax benefit.
Depending on the level of your other itemized deductions, you may want to consider a strategy in which you bunch charitable giving into certain tax years and take the standard deduction in the off years. For example, if you normally give $15,000 per year to charity, plan instead to give $30,000 in 2023 (in order to benefit from itemizing deductions) and then do not give anything in 2024 and take the standard deduction instead.
This can certainly be accomplished by just giving cash to a particular charity every other year. However, if you have appreciated securities (i.e. investments that have grown a lot since you purchased them) in a taxable account, you may want to facilitate tax-efficient charitable giving by donating appreciated securities directly to the charity (to avoid paying capital gains tax) or through a donor-advised fund (DAF). In the case of a DAF, investors donate securities to the DAF and then “advise” that the DAF give grants to their favorite charities. Investors can deduct on their taxes the fair market value of the securities at the time that they donated them to the DAF, avoid paying capital gains tax on the appreciation, and choose when to distribute funds from the DAF (giving from the DAF does not have to take place in the same tax year as the contributions).
Qualified Charitable Distributions. If you are over age 70 ½, another potential vehicle for charitable giving is qualified charitable distributions (QCDs). Instead of paying ordinary income tax on your IRA withdrawals and then giving after-tax money to charity, you can make donations to charities directly from your IRA with pre-tax money. This strategy is particularly valuable for those over age 73 who are subject to required minimum distributions (RMDs) from their IRAs. If done correctly, the QCD amount will be excluded from your adjusted gross income but will still count toward fulfilling your RMD.
Note that you cannot itemize charitable giving done through QCDs, and the gifts must be transferred directly to a charity from one’s IRA, not through a Donor Advised Fund or private foundation (no double dipping on tax breaks!). The limit on QCDs is $100k per year (which will be indexed for inflation starting in 2024), but for most investors, that constraint is not a problem.
Many academic studies have demonstrated the increased satisfaction and joy that comes with being generous, and, of course, the potential tax breaks don’t hurt either. Being strategic in your charitable giving could lower your tax bill in 2023 and beyond, so give us a call to see if any of these options would be beneficial for you.
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