Markus Andrews

ETF Strategist

Assuming the U.S. Securities and Exchange Commission approves spot bitcoin ETFs, more companies might decide to offer it within their 401(k) lineup.
Retirement savers who believe in the long-term potential of the cryptocurrency will have more access to crypto as an asset class, either through their company 401(k) plan or through solo 401(k)s, if applicable, and self-directed IRAs.
Bitcoin is up over 150% year to date, but it is extremely volatile, and many investors don’t have the risk appetite to invest even a portion of their retirement dollars in this emerging asset class.

Paul Yeung | Bloomberg | Getty Images

Retirement savers who want a taste of bitcoin without owning the cryptocurrency coins directly could soon gain the access they’ve been craving.
The Jan. 10 deadline is nearing for U.S. regulators to decide whether to allow a spot bitcoin exchange-traded fund, which would attempt to track the real-time price of bitcoin, and industry participants are feeling hopeful the U.S. Securities and Exchange Commission will give it a thumbs-up.

It remains to be seen how popular such an ETF would be with retail investors, but more than 10 asset managers, including the world’s largest, BlackRock, are working to get their version of a spot bitcoin ETF approved. Industry participants predict that after these offerings become available, it won’t just be high-risk traders, but also retirement savers who will have more access to crypto as an asset class, either through their company 401(k) plan or through solo 401(k)s, if applicable, and self-directed IRAs.
“It’s a big step toward mainstream adoption of bitcoin and cryptocurrency. [Investors] will have more options available,” said Chris Kline, chief revenue officer of Bitcoin IRA, which allows retirement savers to invest in more than 60 cryptocurrencies within retirement accounts. 

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Right now, interest in bitcoin is high. The cryptocurrency is up over 150% this year after a dismal 2022, and the spot bitcoin ETF race has helped push its value higher. But it remains an extremely volatile asset class with as many enemies as true believers.
Many major pension funds have earmarked dollars to crypto as an asset class in recent years. According to the 2022 CFA Institute Investor Trust Study, 94% of state and local pension plans had some crypto exposure. Fidelity Investments, the largest 401(k) plan administrator in the U.S., first added a bitcoin fund option in the fall of 2022 to allow employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin within their company-sponsored 401(k) plan.
Here’s what retirement savers who do see long-term potential in cryptocurrency as an asset class need to know about the potential use cases for spot bitcoin ETFs.

Options to own crypto in retirement accounts are limited

Many employers have been hesitant to offer crypto in a 401(k) based on 2022 guidance from the U.S. Department of Labor, according to industry experts.
With options to own crypto within retirement accounts such as 401(k)s and IRAs being limited, most people who own crypto today do so outside of retirement accounts. Many take a self-custody approach or use an exchange such as Coinbase or Gemini. Options are also available in nonretirement accounts at Fidelity and Betterment, for example.
Accordingly, retirement savers seeking to hold crypto assets in a retirement account typically need to find a self-directed provider that allows crypto investments, and that list is also limited. Once spot bitcoin ETFs are approved, however, expect more providers to allow them, and more options for retirement savers to invest in this fashion, say industry experts. 

If SEC approves over Department of Labor concerns, what happens next

Assuming the SEC gives an affirmative nod to spot bitcoin ETFs, as expected, more companies might decide to offer it within their 401(k) lineup, said Steven T. Larsen, a certified financial planner and founder of Columbia Advisory Partners in Spokane, Washington.
The question is how many.
The Department of Labor doesn’t prohibit crypto in company retirement plans, but in its March 2022 guidance, “it put a pretty heavy thumb on the scale for plan sponsors considering it,” said Joshua Rubin, vice president of legal at Betterment. 
“At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies,” the Department of Labor wrote in a compliance assistance release. 

A spot bitcoin ETF may solve some of the hesitancies the DOL outlined, including concerns related to custody and recordkeeping and valuation, Rubin said. Still, employers may be hesitant to jump on board, at least initially, some industry watchers said.
“Employers will be very reticent about being the first ones out there to allow this,” said Tim Picciott, a CFP with Lexington, Massachusetts-based Innovative Advisory Group. “I don’t see most HR departments and plan trustees just signing on. I think it’s going to have to be a move from the workers” asking for it, he said. 

Spot bitcoin ETFs likely to ‘be everywhere’

While market-leading custodians such as Schwab and Fidelity don’t allow investors to invest directly in cryptocurrencies within individual retirement accounts, they have become more involved in the crypto market on multiple fronts, from venture investments both financial services giants made in a crypto trading infrastructure company to a thematic crypto fund launched by Schwab.
But to invest directly, retirement investors need to work with other providers such as Bitcoin IRA, BitIRA and iTrustCapital.
However, market watchers predict more mainstream custodians will offer spot bitcoin ETFs once they become available. “It will be everywhere once these come out,” said Larsen, who is also the founder of Defi Steward, which helps investment advisors manage digital assets for clients. “This is great for people who want exposure to bitcoin as an asset class,” he said.

Tax advantages for long-term crypto investors

There are a lot of factors that go into whether bitcoin has a place in your retirement portfolio. First and foremost, bitcoin is extremely volatile and many investors don’t have the risk appetite to invest even a portion of their retirement dollars in this emerging asset class. Investors also need to consider whether they want to hold bitcoin directly in a self-directed IRA, or solo 401(k), if applicable, or invest in bitcoin through an ETF. 
With a spot bitcoin ETF, having a professional manager who is going to be diversifying access to crypto could lessen — though not eliminate — risk, said Mark Parthemer, chief wealth strategist at Glenmede, a wealth management firm.

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On the other hand, there can be advantages to owning bitcoin directly through a self-directed IRA, Kline said. For instance, when it comes time to take your withdrawals after age 59½, you may be able to receive your distribution as the crypto asset itself, instead of taking the cash. When you sell the spot bitcoin ETF, the redemption would likely be for cash, he said. It’s an approach the SEC regards as safer.
In either case, there can be tax advantages for long-term investors who invest in crypto through a retirement account versus a brokerage account, Parthemer said. Assuming the investment increases dramatically, a retirement account allows investors to avoid the tax at the time of sale. If it’s in a Roth IRA and you meet the holdings requirements, the withdrawals aren’t subject to tax. By contrast, if you held it in a regular brokerage account and sold it, you could be subject to capital gains taxes at the time of sale, Parthemer said.

Options if your employer won’t offer a spot bitcoin ETF

If your employer won’t offer a spot bitcoin ETF in its 401(k) plan, you could always ask your employer to reconsider. If the answer is no, you can still open an IRA with a provider that makes spot bitcoin ETFs available.
The new spot bitcoin ETFs will be eligible for use in all types of IRA accounts — deductible, nondeductible, Roth and SEP, as well as solo 401(k) plans, said Ric Edelman, founder of Edelman Financial Services, in an email.

“Given the outsized returns that many people expect these ETFs to produce over time, buying them inside an IRA account is going to be a common recommendation by financial advisors,” said Edelman, who wrote the 2022 book, “The Truth About Crypto” to educate advisors on the asset class and has described it as a once-in-a-generation wealth opportunity.
There are applications for an Ether ETF, but that’s likely to be approved by the SEC at a later point, Larsen said. “The spot bitcoin ETF will be the test case.” More

The IRS has unveiled a “voluntary disclosure program” for businesses that claimed a pandemic-era tax credit in error and want to pay the money back.
The new voluntary disclosure program offers the chance to repay credits received at a 20% discount to cover third-party promoter fees.  
The deadline to apply to the voluntary disclosure program is March 22, 2024.

IRS Commissioner Daniel Werfel testifies before the House Small Business Committee on July 17, 2013.
James Lawler Duggan | Reuters

The IRS has unveiled a “voluntary disclosure program” for businesses that claimed a pandemic-era tax credit in error and want to pay the money back.
Worth thousands per employee, the employee retention tax credit, or ERC, was designed to support small businesses affected by the Covid-19 pandemic. The lucrative tax break sparked a cottage industry of firms pushing employers to wrongly claim the credit. 

The IRS unveiled a “special withdrawal process” for companies with pending claims in September. The new voluntary disclosure program offers applicants the chance to repay credits received at a 20% discount to cover third-party promoter fees.  
However, it’s a “limited-time offer,” IRS Commissioner Danny Werfel said during a press call Thursday. The deadline to apply to the voluntary disclosure program is March 22, 2024.
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“We urge employee retention credit recipients who think they were misled by promoters to review these special programs, including either the disclosure program or the withdrawal option, depending on their situation,” Werfel said.
The new program comes roughly two weeks after the IRS announced it’s sending more than 20,000 ERC rejection letters to taxpayers as part of its crackdown on “dubious” filings. 

Werfel said the IRS is sending another round of letters to companies that wrongly received the ERC and those taxpayers will not be eligible for the voluntary disclosure program.
“It’s for those that have received the claim, or received their credit, and have not yet heard from the IRS,” he said.
To qualify for the program, companies must provide the IRS with contact information for any advisors or tax preparers who assisted them with the erroneous claim, along with details about the services.  

Companies can apply for the program by filing Form 15435, which can be submitted through the IRS’ document upload tool.
Participants won’t owe interest or penalties if they repay 80% of the credit upon signing the closing agreement. However, interest and penalties will apply for repayment via installment agreements.Don’t miss these stories from CNBC PRO: More

Both new and used cars were expensive for drivers this year, as poor inventory and high borrowing costs affected affordability.
Yet, consumers might begin to see cooler prices in 2024 due to improvements in the supply chain bolster inventory and declining interest rates.
“It’s going to be a much better time for a consumer to buy a car in 2024 versus this year,” said Paul Waatti, an industry analyst at market research firm AutoPacific.

Maskot | Maskot | Getty Images

Both new and used car purchases were expensive for drivers this year, as limited inventory and high borrowing costs affected affordability.
“Interest rates have taken such a toll on purchasing power,” said Ivan Drury, director of insights at Edmunds.

Yet, consumers might begin to see lower prices in 2024, experts say. Improvements in the supply chain ought to bolster inventory, while interest rate cuts are on the horizon.
“It’s going to be a much better time for a consumer to buy a car in 2024 versus this year,” said Paul Waatti, an industry analyst at market research firm AutoPacific.
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November was the third consecutive month when the average transaction price for a new car was lower than last year. The average new car sold for $48,247 in November, an increase of less than 1% from October, but a 1.5% decline from last year, according to data from Kelley Blue Book.
Edmunds puts the November average at slightly less, $47,939, per data it provided to CNBC.

‘As supply goes up, we tend to see more incentives’

In 2023, low inventory in a high-demand market left little room for discounts. That is likely to change next year as dealers will be motivated to sell more cars on the lot, experts say.
“As supply goes up, we tend to see more incentives being thrown on the hoods,” said Waatti.
Car shoppers could see more models with lower sticker prices before discounts, too. As supply chains continue to normalize, “we’re going to start to see automakers build more lower-end models, which are more affordable, and that should help bring that average monthly payment down,” he said.

Electric vehicle shoppers may see more deals

Most of the consumers who bought a new EV in the last year are still considered “early adopters,” or buyers who like to have the latest technology and are not as price sensitive, said Waatti.
“We’ve pretty much run through all of the early adopters at this point. Now we’re seeing the natural demand for EVs to show up and it’s not as robust, posing a slight decline in sales,” he said.
Some automakers are recalibrating their production in response to that lower demand. For instance, Ford Motor plans to cut production of the F-150 Lightening by half in 2024: “That’s a very high number,” said Drury.
Similarly, General Motors says they’re pushing out the launch of the all-electric Chevrolet Silverado for another year, said Drury.
“These vehicles we had very high hopes for, a lot of anticipation…they’re getting unfulfilled,” he said.

While market growth is expected to continue, it’s not going to be at the same rate like the past 12 to 18 months, said Waatti.
After two to three years of “full steam ahead,” electric cars are now “sitting on dealer’s lots collecting dust,” said Drury: “We don’t have the enthusiasm we used to.”
As manufacturers and dealers look to clear out those vehicles, shoppers might come across more plentiful incentives next year as well as less expensive new models.

2 things to consider when car shopping in 2024

Here are two key things to keep in mind if you’ve been waiting for prices to cool before buying a new car:
1. Incentives are making a comeback: While incentives such as rebates and discounts slightly declined in October, they rebounded to the highest point of the year in November, according to Cox Automotive.
More incentives are likely to appear as more cars become available on the lot, said Drury. If you need a new car, “look for those incentives, they do exist,” he said.
2. Make the most of your trade-in: Limited supply of new and affordable cars in the past years pushed buyers into the used market. As demand for used cars increased, so did the prices, said Waatti. However, used car values are coming down, meaning trade-in values are weakening as well.
“We’re not defying market norms anymore, your value is not going to be going up anytime soon,” said Drury.
Get an estimate of the trade-in value from a dealer and consider selling the car yourself if you want to maximize the value of the car, said Waatti. More

Almost half, 43%, of unmarried American adults want to get married in the future, according to a 2022 Harris Poll survey. But only 28% said they want to have a child.
This trend has contributed to the growth of a household configuration popularly referred to as DINKs: “dual income, no kids.”

“This idea and household configuration of dual-income partners living alone without children is on the rise,” according to Misty L. Heggeness, an associate research scientist at the University of Kansas’ Institute for Policy and Social Research. “In 2022, it was around 43% of households, and that’s about a 7% increase from a decade previously.”
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Almost half, 46%, of adults in the Harris Poll survey who do not have children and do not want to have a child in the future pointed to their personal financial situation as a reason, while 33% noted housing prices as a factor.
“When we advise clients about having children, we honestly don’t even give them the full real details and the real numbers,” said Shannon McLay, founder of The Financial Gym. “It’s one of those things if you see the math of it all, it might make you decide to not have children.”

Besides eliminating expenses such as child care, DINKs can also fully reap the benefits of combining their finances.

“Being able to split our finances, to look at both of our incomes coming in and see how we’re able to handle all of that because we don’t have extra finances with a child or anything like that, it’s much more comfortable,” said Taylor Graves, a 32-year-old project manager in health-care technology who has been living the DINK lifestyle for 10 years. “We get to focus more on the things that we want to do, saving a lot of that money for the future and worry less about the day-to-day finances of the house and our bills.”
Watch the video to find out more about what it’s like to live the DINK lifestyle. More

Tesla is slated to see the highest net inflows from retail traders of any security in 2023, research shows.
It’s a crowning moment for the stock, which climbed in individual investor interest in recent years.
Everyday investors say they like Tesla because of its disruptive technology and focus on the future.

Several Tesla electric vehicles are parked in front of a Tesla service center in the Kearny Mesa region, in San Diego, California, U.S., October 31, 2023. 
Abhirup Roy | Reuters

Marko Sustic has bet big on Tesla this year.
The investor, who also happens to work in the European auto industry, bought Tesla shares nearly every month in 2023 and has almost doubled the size of his position over the course of the year. Sustic has no other electric vehicle holdings out of a belief that competitors won’t be able to beat Tesla’s technology.

“There is no catching up with them,” said the 32-year-old, who also has two Tesla cars at his home in Croatia. “It’s just a matter of time when the stock will explode.”
Sustic isn’t alone. Tesla, which entered the S&P 500 three years ago this week, is on pace to attract the largest flow of individual investor dollars of any security in 2023, according to data from Vanda Research. The firm calculates net inflows to find these favorites, subtracting the amount of stock sold from what was bought.
That means Tesla will eclipse even the SPDR S&P 500 ETF Trust (SPY), which tracks the largest stock market index in the world. This underscores the stock’s fast ascent to retail-investor glory, especially considering Tesla wasn’t even among the top 20 equities that individual investors bought before 2019, Vanda data shows.

A banner year

Tesla’s increasing favor among retail traders can be tied to its comeback in 2023, according to Christopher Schwarz, a finance professor at the University of California Irvine. After plunging 65% in 2022, the Elon Musk-led stock has more than doubled in 2023.
The stock has outperformed the market this year in tandem with other mega-cap technology equities dubbed the “Magnificent 7.” Many investors looking to play “disruptive” technology in this elite group have focused on Tesla and chipmaker Nvidia. But after more than tripling this year thanks to an appetite for all things tied to artificial intelligence, Schwarz said Nvidia may be too expensive for many individual investors.

Schwarz researches retail trader behavior, and thinks a lot of attention comes from Musk. The Tesla CEO’s contentious purchase of X, formerly known as Twitter, has brought increased media coverage as well as scrutiny of the billionaire business mogul, Schwarz said.
When faced with thousands of stocks to choose from, Schwarz said individual traders mainly look for names that grab their attention, are familiar and have saliency to current trends. Given Musk’s persona, the growing ubiquity of Teslas on the road and concerns about climate change, Schwarz said Tesla checks many boxes for everyday investors.
“It’s always in people’s minds to trade when they’re looking for something to trade,” Schwarz said.

Stock chart icon

Tesla over the last 5 years

‘That was a bargain’

Individual investors told CNBC that Tesla’s bumpy ride in recent years hasn’t made them doubt the company as much as it’s created opportunities to pick up shares at cheaper prices. To them, there’s little doubt Tesla’s share price will continue to surge.
One of those is Jeremy Ford, a construction contractor in Virginia who first bought Tesla shares as the pandemic took hold in 2020. He became interested when his wife considered — and ultimately ended up — purchasing a Tesla.
Ford has tried to time buying and selling shares to Tesla news over the past year. For example, he sold some stock before what turned out to be poor third-quarter delivery numbers, only to load back up ahead of the release of new details about Tesla’s electric pickup truck.
The 48-year-old now holds about the same number of Tesla shares as he did when 2023 began, but lowered his cost basis. Given an interest in disruptive technology, Ford reallocated some of those profits to new stakes in Palantir and Nvidia. The latter is tracking to see the fourth largest net inflows this year, while the former is not in the top 20, according to Vanda data.

Elon Musk speaks onstage during The New York Times Dealbook Summit 2023 at Jazz at Lincoln Center on November 29, 2023 in New York City. 
Slaven Vlasic | Getty Images

Still, he’s all in on Tesla’s story, citing the push into robots and AI chips as cause for long-term optimism. His only serious concern would be if Musk left and the company’s performance worsened.
“If you can find a company that makes a product that people love, and it’s different than anything that other people have, then you have that chance to really make substantial money,” Ford said. “At some point, I do believe that I’ll look back at the price of the stock now and go, ‘Wow, that was a bargain.'”

‘Guts and heart’

Despite Tesla’s strong year on Wall Street and Main Street, others see challenges ahead. Roth MKM analyst Craig Irwin said profit margins could come under pressure from additional price cuts amid cooling growth.
But that may not dent individual investors’ enthusiasm. In fact, Irwin said the stock could be a beneficiary of turbulence in the electric vehicle industry, because any uncertainty would lead investors to companies like Tesla that have proven they can design, make and sell vehicles.
Given their affinity for the brand, Irwin said retail investors may also stick with Tesla longer than institutional investors. That could keep Tesla stock “levitating” above where it would otherwise be priced.
“Retail tends to trade on guts and heart,” Irwin said. “And a lot of people love Tesla.”
Changes in individual investor sentiment are so key to Tesla’s stock performance that hedge funds take note of these trends when evaluating what to do, the analyst noted earlier this year.
Irwin is in the majority on Wall Street in giving Tesla a neutral rating of no more than “hold,” neither recommending it be bought nor sold. Following 2023’s rebound, the average analyst surveyed by LSEG sees the stock falling about 13% over the next year.

Individual investors have often been the butt of the joke, with investing experts pointing to their inability to time the market and best allocate their money.
Yet individual traders have gained attention following the rise of short-squeezed “meme” stocks during the pandemic. Even as that craze fizzled, retail trading remains popular: Everyday investors put more than four times the amount of money into their 20 most-bought securities in 2023 than they did in all of 2018, according to Vanda data from early December.
For Schwarz, the UC professor, the flight to Tesla this year is complicated.
It’s concerning, he said, if individual investors are making bigger bets on single stocks than funds that invest in diversified indexes like the S&P 500 ETF. Still, while investments that spread bets across a pool of stocks is safer, trying to pick certain companies is more desirable than not being in the market at all, he said. 
“Traders would be much better off if they just bought [the] index and forgot the password to their brokerage account,” he said. But, “even if Tesla doesn’t do as well as the market, it’s still better than probably just spending it on useless consumption and not participating.” More

The Powerball jackpot has soared to an estimated $572 million, making it the fourth prize to exceed $500 million in 2023.
There are two payout options for the winner: annuitized payments worth $572 million or a lump sum valued at $286.7 million.
The next Powerball drawing is Wednesday at 10:59 p.m. ET.

Medianews Group | Getty Images

Whether you pick the lump sum or annuity payout, Loyd suggests a “cooling off period” after winning the lottery before making any big financial moves.
If you’re planning to donate money to charity, start a business or make any investments, it will be “really tricky” to line up the right team of experts before year-end. “You probably wouldn’t be getting the ‘A’ team,” Loyd said. “So, I would buy yourself some time.”

Plan for higher taxes in 2026

The winner will also need to plan for looming tax law changes slated for 2026 when provisions sunset from former President Donald Trump’s signature tax overhaul.
For example, without changes from Congress, the top federal income tax bracket will revert to 39.6% from 37%. “That’s a lot of money,” Loyd said.
The winner will also need to plan for federal estate taxes. While the exemption rises to $13.61 million per individual or $27.22 million for married couples in 2024, those limits will drop by roughly one-half in 2026.
Robert Dietz, national director of tax research at Bernstein Private Wealth Management in Minneapolis, said estate tax exemption change is “the biggest issue” his firm is talking about with high-net-worth clients right now.

Wednesday’s Powerball drawing comes roughly two months since a single ticket sold in California won the game’s $1.765 billion jackpot. Meanwhile, the Mega Millions jackpot is back down to $57 million and the odds of winning that prize are roughly 1 in 302 million.Don’t miss these stories from CNBC PRO: More

The IRS is waiving roughly $1 billion in late-payment penalties for millions of taxpayers with balances under $100,000 from returns filed in 2020 and 2021.
Penalty relief is automatic, however failure-to-pay fees for unpaid balances from 2020 and 2021 will resume April 1, 2024.
“IRS is providing a financial breather to taxpayers,” said certified financial planner Sean Lovison, founder of Purpose Built Financial Services.

Jgi/jamie Grill | Tetra Images | Getty Images

The IRS is waiving roughly $1 billion in late-payment penalties for millions of taxpayers with balances under $100,000 from returns filed in 2020 and 2021.
Some 4.7 million individual taxpayers, businesses, trusts, estates and nonprofit organizations are eligible for the relief, which amounts to about $206 per return, the agency said Tuesday.

“IRS is providing a financial breather to taxpayers,” said certified financial planner Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services. He is also a certified public accountant.
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The penalty removal is automatic and filers who already paid late-payment penalties for the 2020 and 2021 tax years will receive a refund or credit, the IRS said. However, late-payment penalties for unpaid balances from 2020 and 2021 will resume April 1, 2024.
“December to April is clearly a time taxpayers want to put this away” and make a plan to pay off balances to avoid enforcement, said Darren Guillot, national director at Alliantgroup, who previously served as IRS deputy commissioner of the agency’s small business division.

December to April is clearly a time taxpayers want to put this away.

Darren Guillot
National director at Alliantgroup

The waiver applies to the failure-to-pay penalty, which is 0.5% of unpaid taxes per month or partial month, capped at 25%.

However, eligible taxpayers may still be subject to the failure-to-file penalty and interest, the IRS said. The late filing penalty is 5% of unpaid taxes per month or partial month, with a maximum fee of 25%. Interest rates are currently 8% per year, compounded daily.

‘Normal collection mailings’ will resume in 2024

The penalty relief comes as the IRS prepares to resume collection notices that were temporarily paused in February 2022 due to “high inventories” created by the Covid-19 pandemic. In some cases, taxpayers with 2020 or 2021 balances may have only received an initial notice before the pause.
“As the IRS has been preparing to return to normal collection mailings, we have been concerned about taxpayers who haven’t heard from us in a while suddenly getting a larger tax bill,” IRS Commissioner Danny Werfel said in a statement. “The IRS should be looking out for taxpayers, and this penalty relief is a common-sense approach to help people in this situation.”

Starting next month, the IRS will send a “special reminder letter” to inform taxpayers about their liability, ways to make a payment and details about the penalty relief.
“You can’t bury your head and pretend it will go away,” Guillot said, noting the importance of taking action after receiving an IRS notice.
Taxpayers have “flexible” payment options for unpaid balances and most filers can set up payment plans by scanning the QR code from their IRS notice, he said.

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Today’s Social Security beneficiaries may move in and out of the workforce before fully retiring.
That may trigger a rule called the retirement earnings test, which can temporarily reduce benefits.

GlobalStock | Getty Images

How the retirement earnings test works

The retirement earnings test applies to Social Security retirement beneficiaries who are under full retirement age, which is generally between age 66 or 67 depending on date of birth.

If a beneficiary is under full retirement age and continues to work, they may have their benefits reduced by $1 for every $2 they earn over a certain threshold.
In 2023, the rule applies to income over $21,240. In 2024, that will get pushed up to $22,320.
Notably, the rule is different for the year in which a beneficiary reaches full retirement age, when $1 is deducted for every $3 over a separate limit. In 2023, that applies to earnings over $56,520 only for the months before a beneficiary reaches full retirement age. In 2024, that limit will go up to $59,520.

Why the retirement earnings test is misunderstood

The Social Security Administration’s policy calls for its field office staff to discuss the retirement earnings test with all retirement benefit applicants to whom the rule may apply.
However, that does not always happen, according to the Social Security Advisory Board.
Moreover, those conversations also often do not happen with prospective beneficiaries who have stopped working. Since today’s workers are more likely to move in and out of the workforce before they fully retire, those beneficiaries may be affected by the rule if they choose to return to work.
The Social Security Administration could also make the information it provides on the retirement earnings test on its website easier to understand and related tools easier to use, according to the report.

Misunderstanding of the retirement earnings test often prompts beneficiaries to delay claiming benefits until full retirement age, according to Emerson Sprick, senior economic analyst at the Bipartisan Policy Center.
“In general, we think that is a good outcome,” Sprick said.
Beneficiaries who claim at full retirement age receive 100% of the benefits they earned, while those who claim earlier have their benefits permanently reduced.
“But the fact that that’s being done because of a misunderstanding of what the retirement earnings test does, is certainly not a good way to achieve that,” he said.
For the vast majority of people who are affected by the retirement earnings test, there is no effect on the amount of their lifetime benefits, Sprick noted.
However, a misunderstanding of the rule’s consequences may prompt people to reduce their earned income.
“You see folks who would perhaps work more working less to ensure that their income stays under that threshold,” Sprick said.
The Bipartisan Policy Center has advocated for the Social Security Administration to better communicate how it works, as well as possibly eliminate the rule altogether due to the labor disincentives it may create.
Instead of calling the rule a retirement earnings test, the language could be changed to “temporary benefit withholding” to better convey the benefit consequences, Sprick said.

How to avoid a ‘real problem situation’

Many financial advisors incorrectly describe the retirement earnings test as a tax and neglect to explain that the benefit reductions will lead to a higher monthly benefit once beneficiaries reach full retirement age, the Social Security Advisory Board report notes.
“Number one, it’s not a tax,” said Joe Elsasser, a certified financial planner and founder and president of Covisum, a Social Security claiming software company.
“Number two, your benefit is adjusted at full retirement age,” he said.

Additionally, as beneficiaries continue to work, they also continue to pay Social Security payroll taxes, which may increase their benefits if that time falls within their highest earning years the program uses to calculate benefits.
Importantly, those beneficiaries need to watch for a “real problem situation” that may arise if they do not properly report their projected wages to the Social Security Administration, Elsasser noted.
That will ultimately catch up to beneficiaries come tax season, when the IRS reports wages to the Social Security Administration.
If they determine benefits have been overpaid, they will withhold benefits until they recoup that sum, prompting an unexpected shortfall for beneficiaries.
“That’s the surprise to try to avoid,” Elsasser said. More