Save for retirement by getting the most out of your 401(k) plan

Save for retirement by getting the most out of your 401(k) plan

Socking away money in a tax-advantaged retirement plan can help you reduce taxes and help secure a comfortable retirement. If your employer offers a 401(k) or Roth 401(k), contributing to the plan is a smart way to build a substantial nest egg.

If you’re not already contributing the maximum allowed, consider increasing your contribution. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a major impact on the amount of money you’ll have in retirement.

With a 401(k), an employee makes an election to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The amounts are indexed for inflation each year and not surprisingly, they’re going up quite a bit. The contribution limit in 2023 is $22,500 (up from $20,500 in 2022). Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $7,500 in 2023 (up from $6,500 in 2022). This means those 50 and older can save a total of $30,000 in 2023 (up from $27,000 in 2022).

Contributing to a traditional 401(k) 

A traditional 401(k) offers many benefits, including:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

If you already have a 401(k) plan, take a look at your contributions. In 2023, you may want to try and increase your contribution rate to get as close to the $22,500 limit (with an extra $7,500 if you’re age 50 or older) as you can afford. Keep in mind that your paycheck will be reduced by the amount of the contribution only, because the contributions are pretax — so, income tax isn’t withheld.

Contributing to a Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. That’s because your ability to make a Roth IRA contribution is reduced or eliminated if your adjusted gross income exceeds certain amounts.

Looking ahead

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies in your situation.

Nest Egg 401(k)

Self-employed? Build a nest egg with a solo 401(k) plan

Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.

This strategy is geared toward self-employed individuals including sole proprietors, owners of single-member limited liability companies and other one-person businesses.

Go it alone

With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.

For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.

On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.

For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:

  • $61,000 ($67,500 if you’ll be 50 or older as of December 31, 2022), or
  • 100% of your net SE income.

Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.

Pros and cons

Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.

In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.

The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.

If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.

Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:

  • You want to make large annual deductible contributions and have the money,
  • You have substantial net SE income, and
  • You’re 50 or older and can take advantage of the extra catch-up contribution.

Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.

© 2022

Tax considerations when adding a new partner at your business

Adding a new partner in a partnership has several financial and legal implications. Let’s say you and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to it. Let’s further assume that your bases in your partnership interests are sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your bases to zero.

Not as simple as it seems

Although the entry of a new partner appears to be a simple matter, it’s necessary to plan the new person’s entry properly in order to avoid various tax problems. Here are two issues to consider:

First, if there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change is treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. In order to avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner.

Second, the tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. Generally speaking, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted.

The most important effect of these rules is that the new partner must be allocated a portion of the depreciation equal to his share of the depreciable property based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other effect is that the built-in gain or loss on the partnership assets must be allocated to the current partners when partnership assets are sold. The rules that apply here are complex and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.

Keep track of your basis

When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s imperative to keep proper track of your basis because it can have an impact in several areas: gain or loss on the sale of your interest, how partnership distributions to you are taxed and the maximum amount of partnership loss you can deduct.

Contact us if you’d like help in dealing with these issues or any other issues that may arise in connection with your partnership.

© 2022

Establish a tax-favored retirement plan

If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).

More options

Other small business retirement plan options include:

  • 401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
  • Defined benefit pension plans, and

Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Deadlines to establish and contribute

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Important: The SECURE Act provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.

For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.

While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan alternatives. Be aware that, if your business has employees, you may have to make contributions for them, too.

© 2022

The Ins and Outs of IRAs

Traditional IRAs and Roth IRAs have been around for decades and the rules surrounding them have changed many times. What hasn’t changed is that they can help you save for retirement on a tax-favored basis. Here’s an overview.

Traditional IRAs

You can make an annual deductible contribution to a traditional IRA if:

  • You (and your spouse) aren’t active participants in employer-sponsored retirement plans, or
  • You (or your spouse) are active participants in an employer plan, and your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary annually by filing status.

For example, in 2022, if you’re a joint return filer covered by an employer plan, your deductible IRA contribution phases out over $109,000 to $129,000 of MAGI ($68,000 to $78,000 for singles).

Deductible IRA contributions reduce your current tax bill, and earnings are tax-deferred. However, withdrawals are taxed in full (and subject to a 10% penalty if taken before age 59½, unless one of several exceptions apply). You must begin making minimum withdrawals by April 1 of the year following the year you turn age 72.

You can make an annual nondeductible IRA contribution without regard to employer plan coverage and your MAGI. The earnings in a nondeductible IRA are tax-deferred but taxed when distributed (and subject to a 10% penalty if taken early, unless an exception applies).

You must begin making minimum withdrawals by April 1 of the year after the year you reach age 72. Nondeductible contributions aren’t taxed when withdrawn. If you’ve made deductible and nondeductible IRA contributions, a portion of each distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).

Contribution amounts

The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $6,000 for 2022 and 2021 ($7,000 if age 50 or over). Additionally, your contribution can’t exceed the amount of your compensation includible in income for that year. There’s no age limit for making contributions, as long as you have compensation income (before 2021, traditional IRA contributions weren’t allowed after age 70½).

Roth IRAs

You can make an annual contribution to a Roth IRA if your income doesn’t exceed certain levels based on filing status. For example, in 2022, if you’re a joint return filer, the maximum annual Roth IRA contribution phases out between $204,000 and $214,000 of MAGI ($129,000 to $144,000 for singles). Annual Roth contributions can be made up to the amount allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP or SIMPLE plan.

Roth IRA contributions aren’t deductible. However, earnings are tax-deferred and (unlike a traditional IRA) withdrawals are tax-free if paid out:

  • After a five-year period that begins with the first year for which you made a contribution to a Roth, and
  • Once you reach age 59½, or upon death or disability, or for first-time home-buyer expenses of you, your spouse, child, grandchild, or ancestor (up to $10,000 lifetime).

You can make Roth IRA contributions even after reaching age 72 (if you have compensation income), and you don’t have to take required minimum distributions from a Roth. You can “roll over” (or convert) a traditional IRA to a Roth regardless of your income. The amount taken out of the traditional IRA and rolled into the Roth is treated for tax purposes as a regular withdrawal (but not subject to the 10% early withdrawal penalty).

Contact us for more information about how you may be able to benefit from IRAs.

© 2022

5 possible tax aspects of a parent moving into a nursing home

If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five.

1. Long-term medical care

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.

2. Long-term care insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.

3. Nursing home payments

Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.

4. Head-of-household filing status 

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.

5. The sale of your parent’s home. 

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.

These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance.

© 2021

Retiring soon? 4 tax issues you may face

If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.

Here’s a brief rundown of four tax and financial issues you may deal with when you retire:

Taking required minimum distributions. This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).

Selling your principal residence. Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.

If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis, which can save you tax.

Engaging in new work activities. After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask:

  • Should the business be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
  • Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
  • What expenses can you deduct and can you claim home office deductions?
  • How should you finance the business?

Taking Social Security benefits. If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($18,960 for 2021), you must give back $1 of Social Security benefits for each $2 of excess earnings.

If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($50,520 in 2021) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

Speaking of Social Security, you may have to pay federal (and possibly state) tax on your benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.

Many decisions

As you can see, tax planning is still important after you retire. We can help maximize the tax breaks you’re entitled to so you can keep more of your hard-earned money.

© 2021

New rules will soon require employers to annually disclose retirement income to employees

As you’ve probably heard, a new law was recently passed with a
wide range of retirement plan changes for employers and individuals. One of the
provisions of the SECURE Act involves a new requirement for employers that sponsor
tax-favored defined contribution retirement plans that are subject to ERISA.

Specifically, the law will require that the benefit statements
sent to plan participants include a lifetime income disclosure at least once
during any 12-month period. The disclosure will need to illustrate the monthly
payments that an employee would receive if the total account balance were used
to provide lifetime income streams, including a single life annuity and a
qualified joint and survivor annuity for the participant and the participant’s
surviving spouse.

Background Information

Under ERISA, a defined contribution plan administrator is required to provide benefit statements to participants. Depending on the situation, these statements must be provided quarterly, annually or upon written request. In 2013, the U.S. Department of Labor (DOL) issued an advance notice of proposed rule making providing rules that would have required benefit statements provided to defined contribution plan participants to include an estimated lifetime income stream of payments based on the participant’s account balance.

Some employers began providing this information in these
statements — even though it wasn’t required.

But in the near future, employers will have to begin providing
information to their employees about lifetime income streams.

Effective Date

Fortunately, the effective date of the requirement has been
delayed until after the DOL issues guidance. It won’t go into effect until 12
months after the DOL issues a final rule. The law also directs the DOL to
develop a model disclosure.

Plan fiduciaries, plan sponsors, or others won’t have liability
under ERISA solely because they provided the lifetime income stream
equivalents, so long as the equivalents are derived in accordance with the
assumptions and guidance and that they include the explanations contained in
the model disclosure.

Stay Tuned

Critics of the new rules argue the required disclosures will
lead to confusion among participants and they question how employers will
arrive at the income projections. For now, employers have to wait for the DOL
to act. We’ll update you when that happens. Contact us if you have questions
about this requirement or other provisions in the SECURE Act.

© 2019

Tax Developments: Summary of the 2019 SECURE Act provisions affecting business and individual taxpayers

On December 20, 2019, the SECURE Act, a new tax law included
as part of the Further Consolidated Appropriations Act of 2020, was enacted.
The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act
expands the ability for individuals to maximize their savings and makes
simplifications to the qualified retirement system. This article outlines
specific provisions of the act in summary form and explains the mechanics of
the rules under old and new law.

The changes to the Internal Revenue Code made by this act
apply to individuals who are participants in qualified retirement plans and to
sponsors (i.e. employers) that administer such plans.

The additional flexibility offered by these rules should
help certain individuals, especially those working longer, those working while
obtaining advanced degrees, and families looking to save for college obtain
flexibility in the accumulation and utilization of retirement funds. For
changes to stretch IRAs, many individuals are recommended to review their
estate planning to ensure that the distribution of any retirement accounts is
handled according to their wishes and in accord with new law.

The changes in the Kiddie Tax rules may be a planning
opportunity for families with children who have unearned (usually investment)
income. The ability to elect to apply these rules retroactively may be a place
to find tax savings if the changes under the TCJA had increased the family’s
tax liability in 2018 and 2019.

For employers, the flexibility in setting up a plan and the
expansion of credits available for new plans should make offering qualified
retirement benefits to employees much more attractive. The ability to combine
multiple plans for more efficient growth and investment results should benefit
retirees with increased returns over the life of the plan. At the same time,
increases in penalties means that employers who do administer plans should be
taking extra care that they are meeting all compliance and fiduciary


Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed
once the individual attained age 70½. Starting in 2020, the new rules allow an
individual of any age to make contributions to a traditional IRA, as long as
the individual has compensation, which generally means earned income from wages
or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners
were generally required to begin taking required minimum distributions, or
RMDs, from their plan by April 1 of the year following the year they reached
age 70½. The age 70½ requirement was first applied in the retirement plan
context in the early 1960s and, until recently, had not been adjusted to account
for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plan or IRA
is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring
before 2020, beneficiaries (both spousal and nonspousal) were generally allowed
to stretch out the tax-deferral advantages of the plan or IRA by taking
distributions over the beneficiary s life or life expectancy (in the IRA
context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners
beginning in 2020 (later for some participants in collectively bargained plans
and governmental plans), distributions to most nonspouse beneficiaries are
generally required to be distributed within ten years following the plan
participant s or IRA owner s death. So, for those beneficiaries, the
“stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions
to (1) the surviving spouse of the plan participant or IRA owner; (2) a child
of the plan participant or IRA owner who has not reached majority; (3) a
chronically ill individual; and (4) any other individual who is not more than
ten years younger than the plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancy (as allowed under the rules in effect for deaths
occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known
as a qualified tuition program) is a tax-exempt program established and
maintained by a state, or one or more eligible educational institutions (public
or private). Any person can make nondeductible cash contributions to a 529 plan
on behalf of a designated beneficiary. The earnings on the contributions
accumulate tax-free. Distributions from a 529 plan are excludable up to the
amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses didn't include
the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the
effective date is retroactive), tax-free distributions from 529 plans can be
used to pay for fees, books, supplies, and equipment required for the
designated beneficiary s participation in an apprenticeship program. In
addition, tax-free distributions (up to $10,000) are allowed to pay the
principal or interest on a qualified education loan of the designated
beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA,
P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax
on the unearned income of certain children. Before enactment of the TCJA, the
net unearned income of a child was taxed at the parents' tax rates if the
parents' tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017,
the taxable income of a child attributable to net unearned income is taxed
according to the brackets applicable to trusts and estates. Children to whom
the kiddie tax rules apply and who have net unearned income also have a reduced
exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly
increased the tax on certain children, including those who were receiving
government payments (i.e., unearned income) because they were survivors of
deceased military personnel (“gold star children”), first responders, and
emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie
tax measures that were added by the TCJA. So, starting in 2020 (with the option
to start retroactively in 2018 and/or 2019), the unearned income of children is
taxed under the pre-TCJA rules, and not at trust/estate rates. And starting
retroactively in 2018, the new rules also eliminate the reduced AMT exemption
amount for children to whom the kiddie tax rules apply and who have net
unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be
included in income. And, unless an exception applies (for example, distributions
in case of financial hardship), a distribution before the age of 59-1/2 is
subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are
used to pay for expenses related to the birth or adoption of a child are
penalty-free. That $5,000 amount applies on an individual basis, so for a
married couple, each spouse may receive a penalty-free distribution up to
$5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments
received by graduate and postdoctoral students were not treated as compensation
for IRA contribution purposes, and so could not be used as the basis for making
IRA contributions.

Starting in 2020, the new rules remove that obstacle by
permitting taxable non-tuition fellowship and stipend payments to be treated as
compensation for IRA contribution purposes. This change will enable these
students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income
because their only compensation comes from “difficulty-of-care” payments that
are exempt from taxation. Because those workers do not have taxable income,
they were not able to save for retirement in a qualified retirement plan or

For IRA contributions made after Dec. 20, 2019 (and
retroactively starting in 2016 for contributions made to certain qualified
retirement plans), the new rules allow home healthcare workers to contribute to
a retirement plan or IRA by providing that tax-exempt difficulty-of-care
payments are treated as compensation for purposes of calculating the
contribution limits to certain qualified plans and IRAs.


Unrelated employers are more easily allowed to band together to create a single retirement plan.

A multiple employer plan (MEP) is a single plan maintained
by two or more unrelated employers. Starting in 2021, the new rules reduce the
barriers to creating and maintaining MEPs, which will help increase
opportunities for small employers to band together to obtain more favorable
investment results, while allowing for more efficient and less expensive
management services.

New small employer automatic plan enrollment credit.

Automatic enrollment is shown to increase employee
participation and higher retirement savings. Starting in 2020, the new rules
create a new tax credit of up to $500 per year to employers to defray start-up
costs for new 401(k) plans and SIMPLE IRA plans that include automatic
enrollment. The credit is in addition to an existing plan start-up credit, and
is available for three years. The new credit is also available to employers who
convert an existing plan to a plan with an automatic enrollment design.

Increase credit for small employer pension plan start-up costs.

The new rules increase the credit for plan start-up costs to
make it more affordable for small businesses to set up retirement plans.
Starting in 2020, the credit is increased by changing the calculation of the
flat dollar amount limit on the credit to the greater of (1) $500, or (2) the
lesser of: (a) $250 multiplied by the number of nonhighly compensated employees
of the eligible employer who are eligible to participate in the plan, or (b)
$5,000. The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap.

An annual nondiscrimination test called the actual deferral
percentage (ADP) test applies to elective deferrals under a 401(k) plan. The
ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum
matching or non-elective contributions under either of two safe harbor plan
designs and meets certain other requirements. One of the safe harbor plans is
an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the
default rate under an automatic enrollment safe harbor plan from 10% to 15%,
but only for years after the participant's first deemed election year. For the
participant's first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans.

Currently, employers are generally allowed to exclude
part-time employees (i.e., employees who work less than 1,000 hours per year)
when providing certain types of retirement plans—like a 401(k) plan—to their
employees. As women are more likely than men to work part-time, these rules can
be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most
employers maintaining a 401(k) plan to have a dual eligibility requirement
under which an employee must complete either a one-year-of-service requirement
(with the 1,000-hour rule), or three consecutive years of service where the
employee completes at least 500 hours of service per year. For employees who
are eligible solely by reason of the new 500-hour rule, the employer will be
allowed to exclude those employees from testing under the nondiscrimination and
coverage rules, and from the application of the top-heavy rules.

Loosen notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans.

The actual deferral percentage nondiscrimination test is
deemed to be satisfied if a 401(k) plan includes certain minimum matching or
nonelective contributions under either of two plan designs (referred to as a
“401(k) safe harbor plan”), as well as certain required rights and features,
and satisfies a notice requirement. Under one type of 401(k) safe harbor plan,
the plan either (1) satisfies a matching contribution requirement, or (2)
provides for a nonelective contribution to a defined contribution plan of at
least 3% of an employee's compensation on behalf of each nonhighly compensated
employee who is eligible to participate in the plan.

Starting in 2020, the new rules change the nonelective
contribution 401(k) safe harbor to provide greater flexibility, improve
employee protection, and facilitate plan adoption. The new rules eliminate the
safe harbor notice requirement, but maintain the requirement to allow employees
to make or change an election at least once per year. The rules also permit
amendments to nonelective status at any time before the 30th day before the
close of the plan year. Amendments after that time are allowed if the amendment
provides (1) a nonelective contribution of at least 4% of compensation (rather
than at least 3%) for all eligible employees for that plan year, and (2) the
plan is amended no later than the last day for distributing excess
contributions for the plan year (i.e., by the close of following plan year).

Expansion of portability of lifetime income options.

Starting in 2020, the new rules permit certain retirement
plans to make a direct trustee-to-trustee transfer to another
employer-sponsored retirement plan, or IRA, of a lifetime income investment or
distributions of a lifetime income investment in the form of a qualified plan
distribution annuity, if a lifetime income investment is no longer authorized
to be held as an investment option under the plan. This change permits
participants to preserve their lifetime income investments and avoid surrender
charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements.

After Dec. 20, 2019, plan loans may no longer be distributed
through credit cards or similar arrangements. This change is intended to ensure
that plan loans are not used for routine or small purchases, thereby helping to
preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans.

Starting in 2020, the nondiscrimination rules as they
pertain to closed pension plans (i.e., plans closed to new entrants) are being
changed to permit existing participants to continue to accrue benefits. The
modification will protect the benefits for older, longer-service employees as
they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year.

Starting in 2020, employers can elect to treat qualified
retirement plans adopted after the close of a tax year, but before the due date
(including extensions) of the tax return, as having been adopted as of the last
day of the year. The additional time to establish a plan provides flexibility
for employers who are considering adopting a plan, and the opportunity for
employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams.

The new rules (starting at a to-be-determined future date)
will require that plan participants' benefit statements include a lifetime
income disclosure at least once during any 12-month period. The disclosure will
have to illustrate the monthly payments the participant would receive if the
total account balance were used to provide lifetime income streams, including a
qualified joint and survivor annuity for the participant and the participant s
surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers.

When a plan sponsor selects an annuity provider for the
plan, the sponsor is considered a plan “fiduciary,” which generally means that
the sponsor must discharge his or her duties with respect to the plan solely in
the interests of plan participants and beneficiaries (this is known as the
“prudence requirement”).

Starting on Dec. 20, 2019 (the date the SECURE Act was
signed into law), fiduciaries have an optional safe harbor to satisfy the
prudence requirement in their selection of an insurer for a guaranteed
retirement income contract, and are protected from liability for any losses
that may result to participants or beneficiaries due to an insurer's future
inability to satisfy its financial obligations under the terms of the contract.
Removing ambiguity about the applicable fiduciary standard eliminates a
roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns.

Starting in 2020, the new rules modify the failure-to-file
penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan
reporting) is changed to $250 per day, not to exceed $150,000.

A taxpayer's failure to file a registration statement incurs
a penalty of $10 per participant per day, not to exceed $50,000.

The failure to file a required notification of change
results in a penalty of $10 per day, not to exceed $10,000.

The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. For planning opportunities or to learn more about these changes, please contact our office at 617-651-0531 or by using our contact us form below.

New law helps businesses make their employees’ retirement secure

A significant law was recently passed that adds tax breaks and
makes changes to employer-provided retirement plans. If your small business has
a current plan for employees or if you’re thinking about adding one, you should
familiarize yourself with the new rules.

The Setting Every Community Up for Retirement Enhancement Act
(SECURE Act) was signed into law on December 20, 2019 as part of a larger
spending bill. Here are three provisions of interest to small businesses.

  1. Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to received better investment results, while allowing for less expensive and more efficient management services.
  2. There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
  3. There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of and existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.

These are only some of the retirement plan provisions in the
SECURE Act. There have also been changes to the auto enrollment safe harbor
cap, nondiscrimination rules, new rules that allow certain part-timers to
participate in 401(k) plans, increased penalties for failing to file retirement
plan returns and more. Contact us to learn more about your situation.