The midterm elections of 2024 were among the most controversial in recent memory, with voters weighing in on crucial economic topics like inflation and taxes. While rising prices catch the attention of many voters, the upcoming Election could result in significant changes for retirees and those nearing retirement, given that the Republicans have pledged to cut Social Security and Medicare.
And would Democrats, as they did in 2021, attempt to amend Roth IRA restrictions and estate taxes?
These two main concerns and others could appear on the forthcoming legislative agenda when the new term begins, mainly if there is a shift in the congressional power structure. Here is what individuals planning for retirement must focus on and how they can better secure their future.
Five potential financial shifts to watch after the midterm elections.
The two major political parties have advocated reforms that could impact retirement in the United States, particularly taxes and Social Security. There will be no changes unless the incoming Congress places enough importance on the issue and either political party has enough votes to send legislation to President Biden.
Those who plan to retire soon and retirees should keep an eye on a few key areas.
Massive upheaval to retirement arrangements
In a Congress that appears to be so polarized, a reform of retirement systems seems to be one of the few areas that could garner bipartisan support. And Americans should be on the alert for modifications to existing programs such as 401(k)s and IRAs.
There is some expectation that Congress will consider proposals similar to the Retirement Security & Savings Act and Enhancing American Retirement Now (EARN).
These acts propose several modifications to the current retirement system, including:
Allowing lower-income individuals to make catch-up contributions to pretax or Roth IRAs.
Increasing the minimum employee contribution required to qualify for an employer matching contribution.
Adapting employee hardship distributions
Increasing the yearly catch-up contribution limit to $10,000
Increasing the statutory minimum distribution age from 72 to 75
Providing 401(k) plans to part-time employees.
Permitting SIMPLE IRAs on a Roth basis after taxes
Initial versions of the acts contain dozens of little and big clauses literally, and the final version that becomes law will have to pass through both houses of Congress.
The good news for those attempting to pass legislation through the legislature?
Age increase for mandatory minimum distributions
Multiple pieces of legislation have been introduced to increase the minimum distribution age from 72 to 75; therefore, this move may be more likely than others.
Those with funds in their regular 401(k)s and traditional IRAs could greatly benefit from this adjustment.
Cilley states that delaying the mandatory start date is equivalent to a tax advantage for many of his clients. The requirement to withdraw from and pay taxes on retirement savings has a negative impact on nearly all of the plans drafted by my office.
Reductions in Social Security benefits
The past has been difficult for Social Security to change. Still, many prominent Republicans, notably Florida Senator Rick Scott, have not hesitated in proposing program cuts. As Scott suggests, this might mean reductions in payments or the imposition of automatic five-year sunsets on all federal programs, compelling Congress to renew them.
Despite the reality that moderate increases in payroll taxes may sustain the program for a significantly longer period of time, Republicans are intent on imposing actual, or de facto cuts to Social Security. For example, it may be necessary to raise the retirement age or decrease payouts, and retirees would receive less money.
However, many investment managers do not anticipate significant changes to the Social Security benefits of current retirees or those nearing retirement because it would be too risky to reduce their benefits. This means that the actual reductions in benefits may not occur for years and may be borne by younger Americans.
Casey H. Pisano, CFP, wealth advisor with Biondo Investment Advisors in Sparta, New Jersey, believes it is tough to take something away from seniors and expect to win votes.
American Generation X, millennials, Gen Z, and beyond are among the groups most likely to experience change as a result of these initiatives. It is likely that younger employees may face a higher full retirement age, increased Social Security levy, or both, but not immediately.
According to Social Security trustees, even if politicians do nothing or refuse to raise taxes, the projected budget shortfall will require Social Security to reduce payouts to 80 percent of the stated benefits by 2035.
In other words, future retirement benefits might not be as solid as they are now, says Pisano. Social Security and other programs are at risk regardless of who gains control.
With only 13 years till 2035, many retirees and those nearing retirement can anticipate living into that era and plan accordingly.
Modifications to the estate tax exemption
Current federal legislation permits individuals to avoid estate tax on the first $12.06 million (for 2024) or $12.92 million (for 2024) of their assets (for 2024). This sum has increased significantly since the Tax Cuts and Jobs Act of 2017. After 2025, however, the threshold reverts to its 2017 level of $5.49 million.
This exemption amount could be extended or increased further, so wealthy retirees should keep an eye out for any changes.
Limitations on Roth IRA conversions
In 2021, the Democrats previously attempted to ban the so-called backdoor Roth IRA. It is possible for workers earning too much to qualify for a Roth IRA to convert their traditional IRA contributions to a Roth IRA quickly by contributing to a nondeductible traditional IRA instead of a Roth IRA. Would they attempt again in 2024, or would a bipartisan coalition introduce legislation?
Pisano states it is difficult to foresee any significant changes.
However, Pisano does not rule out the possibility that the Roth IRA may be restricted somehow.
Pisano also added the Backdoor Roth IRAs and other schemes involving Roths might be further restricted to exclude high earners. Still, the planning and advising community has been working on this for a long time.
Three techniques retirement planners can use to protect themselves
Despite the unpredictability of change, retirees have several options for mitigating or taking advantage of it. Remember that there’s still a lot of time between Election Day and Congress getting something done.
Plan proactively
Financial planning should always be proactive and flexible to avoid being caught off guard by changes. And when changes are truly a few years out – as they typically are when the law shifts – the moment to start working proactively is today. Your retirement plan must adapt to various conditions and enable you to thrive.
If you’re making significant changes – such as downsizing or relocating to a new state – it’s essential to consider years ahead so you can plan your strategy accordingly. As a result of declining prices and rising mortgage rates, it may be a particularly unfavorable time to sell a home.
Inflation and interest rates were lower ten months ago, making purchasing another home less appealing.
A recovery in the housing market could lead to a rise in home values in the next two or three years if rates are lower and the economy is reviving.
Diversify your accounts
Diversification is effective in investing, as it helps to smooth returns and reduce risk. But you should also consider applying this strategy to the types of accounts you hold.
Cilley suggests diversifying your savings by using IRAs, 401(k)s, Roth IRAs, regular bank savings, and taxable investments. Keeping a large amount of your money in retirement funds exposes your assets to the risk of fluctuating income tax rates, changes to the rules for mandated distributions, and even changes to the regulations governing how your family can utilize your savings and investments after your death.
Consequently, saving not only in tax-deferred retirement accounts but also in conventional taxable accounts might be advantageous.
Prepare yourself to live without Social Security.
Although 2035 may seem far away, it can take retirees and those nearing retirement a long time to regain the income they may lose if and when Social Security benefits are reduced. If this is the case, even current retirees, let alone those nearing retirement, might easily experience a reduction in benefits. Start planning now because you cannot allow your retirement security to be jeopardized by such a cut.
Everyone affected, including current retirees, must thus examine how they could replace the lost income. There is only one good news for younger Americans: they have decades to save for retirement before outliving their salary. Even modest measures should be taken now by older Americans, who may not be as lucky as the younger generation.
Bottom line
Adapting to and prospering under new financial regulations is possible even when financial regulations change. For the time being, it is crucial to maintain composure, not panic about impending changes, and respond effectively – perhaps with the assistance of a financial advisor – when the time comes to act.