Key individual tax changes from Trump's 'big beautiful' bill
Current law vs. final legislation
Current law | Final legislation |
---|---|
Standard deduction | |
$15,000 single; $30,000 married filing jointly for 2025 | $15,750 single; $31,500 married filing jointly for 2025 |
'Bonus' deduction for older adults | |
$1,600 for age 65 and older for 2025; $2,000 unmarried / not surviving spouse for 2025 | $7,600 for age 65 and older; $8,000 for unmarried / not surviving spouse; both from 2025 through 2028 |
State and local tax deduction (SALT) | |
$10,000 limit through 2025 | $40,000 limit for 2025; increases by 1% through 2029; reverts to $10,000 in 2030 |
Child tax credit | |
Max credit of $2,000 per child through 2025; refundable portion $1,700 for 2025 | Max credit of $2,200 per child; refundable portion $1,700 for 2025 |
Estate and gift tax exemption | |
$13.99 million single; $27.98 million married filing jointly for 2025 | $15 million single; $30 million married filing jointly for 2026 |
Tax on tips | |
N/A | Deduct up to $25,000 per year from 2025 though 2028 |
Overtime pay | |
N/A | Deduct up to $12,500 per taxpayer from 2025 through 2028 |
Auto loan interest | |
N/A | Deduct up to $12,500 per taxpayer from 2025 through 2028 |
Auto loan interest | |
N/A | Deduct up to $10,000 of annual interest on new loans from 2025 through 2028 |
Trump Accounts for child savings | |
N/A | One-time $1,000 credit to account per child born between 2025 through 2028 |
Charitable deduction for non-itemizers | |
N/A after 2021 | $1,000 single; $2,000 married filing jointly; permanent after 2025 |
Source: CNBC
The enormous entryway Roth IRA is a strategy Merck's 'highly compensated employees' (HCEs) can use to increase retirement savings and shield investment growth from retirement taxes.
According to a recent study conducted by the Employee Benefit Research Institute (EBRI) in 2022, it was found that individuals aged 60 and older who have a Mega Backdoor Roth IRA in place tend to have higher retirement savings and potentially enjoy a more tax-efficient retirement. The study revealed that retirees with a Mega Backdoor Roth IRA were able to maximize their after-tax contributions, resulting in a substantial increase in their Roth assets and potential tax-free growth over time. This strategic approach can be particularly beneficial for Merck workers in their 60s who are looking to optimize their retirement savings while minimizing their tax burden.
Let's begin with the fundamentals.
Retirement Savings 101
When you choose to make Roth contributions, you will deposit after-tax dollars into your account. This means that you will pay taxes on the money in the year it is earned, and you will not receive any tax benefits for your contribution.
In exchange, you will not owe taxes on your contributions or future withdrawals. In addition, as long as your Roth contributions have 'matured' for at least five years, any earnings they generate will not be subject to taxation. (However, if Merck made any contributions, you will still be required to pay taxes on those contributions when you withdraw, as you will not have already paid taxes on them. Merck's contributions are always traditional, tax-deductible contributions.)
Limits for 2022 have changed since last year. A person under the age of 50 is eligible to contribute $20,500 to their 401(k). People aged 50 and older may contribute an additional $6,500 annually in catch-up contributions to their 401(k), for a total of $27,000. Limits for total employee and employer contributions have also increased over the past year and now stand at $61,000 (or $67,600 for individuals aged 50 and older).
Some company 401(k) plans permit after-tax contributions, creating a 'mega backdoor' through which you can invest up to an additional $40,500 in your Roth IRA or Roth 401(k).
We'll explain how it works and whether or not it's a good move for you, but you should be aware that this is complex and advanced financial planning with the potential for unexpected tax bills; you should absolutely consult an expert on this one.
Is a Mega Backdoor Roth Possible?
There are two prerequisites; if you are uncertain about either, contact HR or the administrator of your Merck plan.
1. You must be able to make after-tax contributions to your 401(k). Not all 401(k) plans permit contributions after taxes. Quick vocab lesson: After-tax contributions are a distinct category from pre-tax and pre-tax contributions. (We've previously mentioned how after-tax and post-tax were once confused.)
2. In addition, your 401(k) plan must permit in-service withdrawals and Roth conversions. In-service withdrawals (also known as in-service distributions) allow you to transfer funds from your 401(k) to a Roth IRA while you are still employed by Merck. In-plan conversions allow you to convert your after-tax 401(k) contribution to Roth dollars.
Mega Backdoor Roth IRA Pros
- Due to the dollar quantities involved, this strategy can significantly impact your overall retirement savings and tax-free Roth asset pool. Even if Merck only allows this for a few years, it may still be worthwhile if it makes sense given your overall financial situation.
- If the entire massive backdoor Roth strategy is well-planned, it can be relatively simple for an individual to implement.
Mega Backdoor Roth IRA Cons
- Most individuals lack the flexibility to leverage this strategy's benefits, particularly on an after-tax basis.
- Even if individuals have the ability to implement this strategy, it may not be effective at the plan level. Your Merck-sponsored 401(k) plan must satisfy a number of testing requirements. This includes the participation of 'highly compensated employees' or HCEs in comparison to 'non-highly compensated employees' or NHCEs. Logic dictates that if only HCEs make after-tax contributions, the plan may be required to return a portion of the contributions to HCE participants if it fails the test.
How a Mega Backdoor Roth Works
The precise limit on a contribution plan such as a 401(k) is quite high: $61,000 (or $67,500 for those 50 and older) in 2018. This maximum number is comprised of the $20,500 (or $27,000) employee elective deferral amount, as well as any matching contributions from Merck, profit-sharing, and your after-tax contributions.
Using the massive backdoor strategy, you transfer all of your after-tax 401(k) contributions to a Roth IRA or to Roth dollars within your 401(k) before the funds can earn investment returns. Due to IRS nondiscrimination tests, there are also situations in which a company's highest-earning employees cannot contribute the maximum amount after taxes. If withdrawn from a Roth-style account, the money will grow tax-free rather than tax-deferred, meaning neither you nor your beneficiaries will owe taxes on the earnings. Pretty cool.
In-service withdrawals or conversions are one of the requirements, as speed is crucial. You do not want to wait until you depart Merck to transfer that sum of money.
NOTE: If you leave it in your 401(k) as an after-tax contribution, it will accrue taxable earnings the entire time.
Manually completing the process is difficult, and we are here to help.
Consider a scenario in which a missed in-service withdrawal or in-plan conversion has accrued earnings. Certainly not the end of the universe. The IRS confirms that you can transfer the contribution portion to a Roth IRA and the gains portion to a traditional IRA, which requires some effort but preserves the favorable tax status of your contribution.
Calculate Your After-Tax Contribution Amount
You'll note that we repeatedly refer to 'up to $40,500' in additional contributions; this is because each individual's amount after taxes may vary. To make up the difference between the standard employee contribution amount of $20,500/$27,000 and the maximum limit of $61,000/$67,500, you must account for any Merck matching and profit-sharing along the way.
Let's examine a few straightforward scenarios.
Henry, 57
Age-based maximum cap: $67,500
Salary: $100,000
Profit-sharing: 25% of compensation
At 56, Henry has greater potential. Henry has capacity for after-tax contributions of $15,500 if he contributes the maximum $27,000 and receives the maximum $25,000 from his employer.
Nancy, 44
Age-based maximum cap: $61,000
Salary: $100,000
Up to 3 percent of remuneration is matched by the employer
If Nancy contributes the maximum of $20,500 and her employer matches $3,000, she has capacity for $37,500 in after-tax contributions.
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Age-based maximum: $67,500 for Jason (60 years old).
Maximal annual contributions to both his 401(k) ($27,000 in 2022) and IRA ($7,000 in 2022). He wants to save even more by contributing to a mega backdoor Roth IRA, but he also wants to know the utmost after-tax contribution he can make to his 401(k) plan. If his total annual employer contributions are $10,000 in 2022, Jason can contribute up to $30,500 after taxes this year. John would transfer his after-tax contributions to his Roth 401(k) or Roth IRA, allowing him to deposit an additional $30,500 in a Roth account with tax-free growth, assuming his 401(k) plan has the necessary provisions.
Some 401(k) plans limit the amount of after-tax contributions, so even if you have the ability to contribute more, you may not be able to. There are also situations in which a company's highest earners cannot maximize their after-tax contributions due to IRS nondiscrimination tests. These tests are designed to ensure that those earning the most are not saving at a higher rate than the rest of the organization.
And it bears repeating that after-tax contributions are not deductible, and if left in the 401(k) plan rather than being transferred into a Roth-style account, the earnings could be taxed upon withdrawal.
When to contemplate a mega backdoor Roth 401(k)
Mega backdoor Roth IRAs are an intriguing option for high-income Merck employees seeking additional retirement and higher savings options. It is worthwhile to consult a financial planner if:
- You've exhausted out your personal 401(k) contributions. This precedes that. When you've reached your contribution limit and still have more money to save, you can contemplate a mega backdoor strategy.
- You desire to save additional funds for retirement. Mega backdoor Roth IRAs are an excellent method to save money each year. Still, there are a variety of additional financial strategies to consider, such as time horizon and liquidity.
Conclusion
Imagine stumbling upon a well-hidden vault filled with confidential financial strategies. Just as this vault holds exclusive insights, a Mega Roth IRA presents a valuable opportunity for high-income Merck employees approaching retirement. By strategically leveraging after-tax contributions, they can amass a wealth of tax-free growth and earnings within their Roth IRA. Just as the secure vault ensures the protection of valuable assets, the Mega Roth IRA safeguards their retirement funds, providing a prosperous and secure future for those who delve into its specialized knowledge.
Source:
- What to do with an Early Retirement Ebook
- RSUs Essential Facts (Schwab.com, 2022)
- The Mega Backdoor Roth Too Good To Be True?' (Forbes.com, 2022)
- Social Security Ebook
- Lump Sum vs. Annuity Ebook
- 401(k) Rollover Strategies Ebook
- Closing the Retirement Gap Ebook
How long must Merck workers maintain the withdrawals?
The payments must continue for a minimum of five years or until you reach age 59 and a half, whichever is lengthier.
How frequently must Merck employees make withdrawals?
Merck employees are required to accept the payments on an annual basis.
Can Merck workers initiate 72(t) payments from their 401(k)?
The 72(t)-payment plan is applicable only to the IRA or IRAs from which the initial payment was calculated. Depending on your requirements, you can split your IRA into two IRAs prior to establishing a 72(t)-payment plan. One IRA can be used to calculate and withdraw 72(t) payments, while the other remains available for non-72(t) purposes.
How do Merck employees determine payment amounts?
Three methods have been approved by the IRS for calculating 72(t) payments. The required minimum distribution (RMD) method, the amortization method, and the annuity factor method are these methods. The RMD method will initially generate lesser payments than the other two methods. Although other methods of calculating the payments are not strictly prohibited, it would be exceedingly risky to use a method that has not been approved by the IRS. Generally, you should consult a tax or financial advisor when calculating your 72(t) payments.
After beginning 72(t), can Merck employees alter their method?
You can transition from the amortization or annuity factor method to the RMD method. This is a one-time, irreversible change, and the RMD method must be used for the remainder of the schedule.
Can Merck workers cancel their 72(t) payments?
If you do not adhere to your 72(t)-payment plan or if you modify the payments, the 10% penalty exemption will no longer apply. Even worse news: the 10% penalty will be reinstated retroactively for all distributions taken prior to age 59 1/2.
Can Merck employees take 72(t) additional withdrawals in the event of an emergency?
A supplemental withdrawal is regarded as a change to the payment schedule. Any change in the account balance that is not the result of regular gains and losses or 72(t) distributions will also be regarded as a modification and will trigger the 10% penalty. This indicates that neither rollovers nor contributions can be used to fund an IRA. You cannot convert or rollover your 72(t) payments.
Conclusion
In the realm of financial strategies, Merck employees nearing retirement can approach the 72(t) rule with the finesse of a seasoned conductor leading an orchestra. Similar to how a conductor carefully orchestrates the harmony among musicians, understanding and implementing the provisions of the 72(t) rule requires meticulous planning and coordination. By conducting their financial moves with precision, these employees can navigate the complexities of early withdrawals from their retirement accounts, ensuring a harmonious balance between accessing funds and avoiding penalties. Just as a conductor guides a symphony to create a masterpiece, a well-executed 72(t) strategy can lead to a harmonious and secure retirement journey.
How does Merck's new retirement benefits program support long-term financial security for employees, particularly regarding the changes to the pension and savings plans introduced in 2013? Can you elaborate on how Merck's commitment to these plans is designed to help employees plan for retirement effectively?
Merck's New Retirement Benefits Program: Starting in 2013, Merck introduced a comprehensive retirement benefits program aimed at providing all eligible employees, irrespective of their legacy company, uniform benefits. This initiative supports Merck's commitment to financial security by integrating pension plans, savings plans, and retiree medical coverage. This approach not only aims to help employees plan effectively for retirement but also aligns with Merck’s post-merger goal of standardizing benefits across the board.
What are the key differences between the legacy pension benefits offered by Merck before 2013 and the new cash balance formula implemented in the current retirement program? In what ways do these changes reflect Merck's broader goal of harmonizing benefits across various employee groups?
Differences in Pension Formulas: Before 2013, Merck calculated pensions using a final average pay formula which typically favored longer-term, older employees. The new scheme introduced a cash balance formula, reflecting a shift towards a more uniform accumulation of retirement benefits throughout an employee's career. This change was part of Merck's broader strategy to harmonize benefits across various employee groups, making it easier for employees to understand and track their pension growth.
In terms of eligibility, how have Merck's pension and savings plans adjusted for years of service and age of retirement since the introduction of the new program? Can you explain how these adjustments might affect employees nearing retirement age compared to newer employees at Merck?
Adjustments in Eligibility: The new retirement program revised eligibility criteria for pension and savings plans to accommodate a wider range of employees. Notably, the pension benefits under the new program are designed to be at least equal to the prior benefits for services rendered until the end of 2019, provided employees contribute a minimum of 6% to the savings plan. This adjustment aids both long-term employees and those newer to the company by offering equitable benefits.
Can you describe the transition provisions that apply to legacy Merck employees hired before January 1, 2013? How does Merck plan to ensure that these provisions protect employees from potential reductions in retirement benefits during the transition period?
Transition Provisions for Legacy Employees: For employees who were part of legacy Merck plans before January 1, 2013, Merck established transition provisions that allow them to earn retirement income benefits at least equal to their current pension and savings plan benefits through December 31, 2019. This ensures that these employees do not suffer a reduction in benefits during the transition period, offering a sense of security as they adapt to the new program.
How does employee contribution to the retirement savings plan affect the overall retirement benefits that Merck provides? Can you discuss the implications of Merck's matching contributions for employees who maximize their savings under the new retirement benefits structure?
Impact of Employee Contribution to Retirement Savings: In the new program, Merck encourages personal contributions to the retirement savings plan by matching up to 6% of employee contributions. This mutual contribution strategy enhances the overall retirement benefits, incentivizing employees to maximize their savings for a more robust financial future post-retirement.
What role does Merck's Financial Planning Benefit, offered through Ernst & Young, play in assisting employees with their retirement planning? Can you highlight how engaging with this benefit changes the financial landscapes for employees approaching retirement?
Role of Merck’s Financial Planning Benefit: Offered through Ernst & Young, this benefit plays a critical role in assisting Merck employees with retirement planning. It provides personalized financial planning services, helping employees understand and optimize their benefits under the new retirement framework. Engaging with this service can significantly alter an employee’s financial landscape by providing expert guidance tailored to individual retirement goals.
How should employees evaluate their options for retiree medical coverage under the new program compared to previous offerings? What considerations should be taken into account regarding the potential costs and benefits of the retiree medical plan provided by Merck?
Options for Retiree Medical Coverage: With the new program, employees must evaluate both subsidized and unsubsidized retiree medical coverage options based on their age, service length, and retirement needs. The program offers different levels of company support depending on these factors, making it crucial for employees to understand the potential costs and benefits to choose the best option for their circumstances.
In what ways does the introduction of voluntary, unsubsidized dental coverage through MetLife modify the previous dental benefits structure for Merck retirees? Can you detail how these changes promote cost efficiency while still providing valuable options for employees?
Introduction of Voluntary Dental Coverage: Starting January 2013, Merck shifted from sponsored to voluntary, unsubsidized dental coverage through MetLife for retirees. This change aligns with Merck’s strategy to promote cost efficiency while still providing valuable dental care options, allowing retirees to choose plans that best meet their needs without company subsidy.
How can employees actively engage with Merck's resources to maximize their retirement benefits? What specific tools or platforms are recommended for employees to track their savings and retirement progress effectively within the new benefits framework?
Engaging with Merck’s Retirement Resources: Merck provides various tools and platforms for employees to effectively manage and track their retirement savings and benefits. Employees are encouraged to utilize resources like the Merck Financial Planning Benefit and online benefit portals to make informed decisions and maximize their retirement outcomes.
For employees seeking additional information about the retirement benefits program, what are the best ways to contact Merck? Can you provide details on whom to reach out to, including any relevant phone numbers or online resources offered by Merck for inquiries related to the retirement plans?
Contacting Merck for Retirement Plan Information: Employees seeking more information about their retirement benefits can contact Merck through dedicated phone lines provided in the benefits documentation or by accessing detailed plan information online through Merck's official benefits portal. This ensures employees have ready access to assistance and comprehensive details regarding their retirement planning options.