4 new law changes that may affect your retirement plan
If you save for retirement with an IRA or other plan, you’ll be
interested to know that Congress recently passed a law that makes significant
modifications to these accounts. The SECURE Act, which was signed into law on
December 20, 2019, made these four changes.
Change #1: The maximum age for making
traditional IRA contributions is repealed. Before 2020,
traditional IRA contributions weren’t allowed once you reached age 70½.
Starting in 2020, an individual of any age can make contributions to a
traditional IRA, as long he or she has compensation, which generally means
earned income from wages or self-employment.
Change #2: The required minimum distribution
(RMD) age was raised from 70½ to 72. Before 2020, retirement
plan participants and IRA owners were generally required to begin taking RMDs
from their plans by April 1 of the year following the year they reached age
70½. The age 70½ requirement was first applied in the early 1960s and, until
recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plans or IRAs
is increased from 70½ to 72.
Change #3: “Stretch IRAs” were partially
eliminated. If a plan participant or IRA owner died before 2020, their
beneficiaries (spouses and non-spouses) 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. This is sometimes called 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 non-spouse beneficiaries are
generally required to be distributed within 10 years following a plan
participant’s or IRA owner’s death. That means the “stretch” strategy is no
longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s
still allowed for: the surviving spouse of a plan participant or IRA owner; a
child of a plan participant or IRA owner who hasn’t reached the age of
majority; a chronically ill individual; and any other individual who isn’t more
than 10 years younger than a plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancies.
Change #4: Penalty-free withdrawals are now
allowed for birth or adoption expenses. A distribution from a
retirement plan must generally be included in income. And, unless an exception
applies, a distribution before the age of 59½ 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. The $5,000 amount applies on an individual basis. Therefore, each
spouse in a married couple may receive a penalty-free distribution up to $5,000
for a qualified birth or adoption.
Questions?
These are only some of the changes included in the new law. If
you have questions about your situation, don’t hesitate to contact us.
© 2020
New law provides a variety of tax breaks to businesses and employers
While you were celebrating the holidays, you may not have
noticed that Congress passed a law with a grab bag of provisions that provide
tax relief to businesses and employers. The “Further Consolidated
Appropriations Act, 2020” was signed into law on December 20, 2019. It makes
many changes to the tax code, including an extension (generally through 2020)
of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer
Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community
Up for Retirement Enhancement Act).
Here are five highlights.
Long-term part-timers can participate in
401(k)s.
Under current law, employers generally can exclude part-time
employees (those who work less than 1,000 hours per year) when providing a
401(k) plan to their employees. A qualified retirement plan can generally delay
participation in the plan based on an employee attaining a certain age or
completing a certain number of years of service but not beyond the later of
completion of one year of service (that is, a 12-month period with at least
1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other
requirements involving who can participate.
For plan years beginning after December 31, 2020, the new law
requires a 401(k) plan to allow an employee to make elective deferrals if the
employee has worked with the employer for at least 500 hours per year for at
least three consecutive years and has met the age-21 requirement by the end of
the three-consecutive-year period. There are a number of other rules involved
that will determine whether a part-time employee qualifies to participate in a
401(k) plan.
The employer tax credit for paid family and
medical leave is extended.
Tax law provides an employer credit for paid family and medical
leave. It permits eligible employers to claim an elective general business
credit based on eligible wages paid to qualifying employees with respect to
family and medical leave. The credit is equal to 12.5% of eligible wages if the
rate of payment is 50% of such wages and is increased by 0.25 percentage points
(but not above 25%) for each percentage point that the rate of payment exceeds
50%. The maximum leave amount that can be taken into account for a qualifying
employee is 12 weeks per year.
The credit was set to expire on December 31, 2019. The new law
extends it through 2020.
The Work Opportunity Tax Credit (WOTC) is
extended.
Under the WOTC, an elective general business credit is provided
to employers hiring individuals who are members of one or more of 10 targeted
groups. The new law extends this credit through 2020.
The medical device excise tax is repealed.
The Affordable Care Act (ACA) contained a provision that required
that the sale of a taxable medical device by the manufacturer, producer or
importer is subject to a tax equal to 2.3% of the price for which it is sold.
This medical device excise tax originally applied to sales of taxable medical
devices after December 31, 2012.
The new law repeals the excise tax for sales occurring after
December 31, 2019.
The high-cost, employer-sponsored health
coverage tax is repealed.
The ACA also added a nondeductible excise tax on insurers when
the aggregate value of employer-sponsored health insurance coverage for an
employee, former employee, surviving spouse or other primary insured individual
exceeded a threshold amount. This tax is commonly referred to as the tax on
“Cadillac” plans.
The new law repeals the Cadillac tax for tax years beginning
after December 31, 2019.
Stay tuned
These are only some of the provisions of the new law. We will be
covering them in the coming weeks. If you have questions about your situation,
don’t hesitate to contact us.
© 2019
IRA charitable donations are an alternative to taxable required distributions
Are you charitably minded and have a significant amount of money in an IRA? If you’re age 70½ or older, and don’t need the money from required minimum distributions, you may benefit by giving these amounts to charity.
IRA distribution basics
A popular way to transfer IRA assets to charity is through a tax provision that allows IRA owners who are 70½ or older to give up to $100,000 per year of their IRA distributions to charity. These distributions are called qualified charitable distributions, or QCDs. The money given to charity counts toward the donor’s required minimum distributions (RMDs), but doesn’t increase the donor’s adjusted gross income or generate a tax bill.
So while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).
Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions.
Keeping the donation out of your AGI may be important because doing so can:
- Help the donor qualify for other tax breaks (for example, a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI);
- Reduce taxes on your Social Security benefits; and
- Help you avoid a high-income surcharge for Medicare Part B and Part D premiums, (which kicks in if AGI hits certain levels).
In addition, keep in mind that charitable contributions don’t yield a tax benefit for those individuals who no longer itemize their deductions (because of the larger standard deduction under the Tax Cuts and Jobs Act). So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.
Annual limit
There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.
Plan ahead
The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old. If you’re interested in this opportunity, don’t wait until year end to act. Contact us for more information.
© 2019
Grading the performance of your company’s retirement plan
Imagine giving your company’s retirement plan a report card. Would it earn straight A’s in preparing your participants for their golden years? Or is it more of a C student who could really use some extra help after school? Benchmarking can tell you.
Mind the basics
More than likely, you already use certain criteria to benchmark your plan’s performance using traditional measures such as:
- Fund investment performance relative to a peer group,
- Breadth of fund options,
- Benchmarked fees, and
- Participation rates and average deferral rates (including matching contributions).
These measures are all critical, but they’re only the beginning of the story. Add to that list helpful administrative features and functionality — including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.
Don’t overlook useful data
A sometimes-overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally, you’ll need to look at that number in light of the age of your workforce and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.
Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.
What’s a healthy rate? That’s a subjective assessment. You’ll need to examine it within the context of current financial markets. A plan with assets that shrank during the financial crisis about a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of roughly 10%.
Keep participants on track
Ultimately, however, the success of a retirement plan isn’t measured by any one element, but by aggregating multiple data points to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic preretirement income replacement ratio, such as 85% or more?
It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by recordkeepers, involve sophisticated guesswork with respect to participants’ retirement ages and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.
Ask for help
Given the importance of strong retirement benefits in hiring and retaining the best employees, it’s worth your while to regularly benchmark your plan’s performance. For better or worse, doing so isn’t as simple as 2+2. Our firm can help you choose the relevant measures, gather the data, perform the calculations and, most important, determine whether your retirement plan is really making the grade.
© 2019
Thinking about moving to another state in retirement? Don’t forget about taxes
When you retire, you may consider moving to another state — say, for the weather or to be closer to your loved ones. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complicated than it initially appears to be.
Identify all applicable taxes
It may seem like a no-brainer to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.
If the states you’re considering have an income tax, look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Watch out for state estate tax
The federal estate tax currently doesn’t apply to many people. For 2019, the federal estate tax exemption is $11.4 million ($22.8 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.
Establish domicile
If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.
How do you establish domicile in a new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:
• Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
• Change your mailing address at the post office,
• Change your address on passports, insurance policies, will or living trust documents, and other important documents,
• Register to vote, get a driver’s license and register your vehicle in the new state, and
• Open and use bank accounts in the new state and close accounts in the old one.
If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help with these returns.
Make an informed choice
Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises.
© 2019
Consider a Roth 401(k) plan — and make sure employees use it
Roth 401(k) accounts have been around for 13 years now. Studies show that more employers are offering them each year. A recent study by the Plan Sponsor Council of America (PSCA) found that Roth 401(k)s are now available at 70% of employer plans, up from 55.6% of plans in 2016.
However, despite the prevalence of employers offering Roth 401(k)s, most employees aren’t choosing to contribute to them. The PSCA found that only 20% of participants who have access to a Roth 401(k) made contributions to one in 2017. Perhaps it’s because they don’t understand them.
If you offer a Roth 401(k) or you’re considering one, educate your employees about the accounts to boost participation.
A 401(k) with a twist
As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from employer-sponsored 401(k)s.
An employer with a 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts.
As with traditional 401(k)s, eligible employees can elect to defer part of their salaries to Roth 401(k)s, subject to annual limits. The employer may choose to provide matching contributions. For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) to a Roth 401(k). The most you can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).
Note: The ability to contribute to a Roth IRA is phased out for upper-income taxpayers, but there’s no such restriction for a Roth 401(k).
The pros and cons
Unlike with traditional 401(k)s, contributions to employees’ accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key 401(k) tax benefit. On the plus side, after an initial period of five years, “qualified distributions” are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, regular 401(k) distributions are taxed at ordinary-income rates, which are currently up to 37%.
In general, qualified distributions are those:
• Made after a participant reaches age 59½, or
• Made due to death or disability.
Therefore, you can take qualified Roth 401(k) distributions in retirement after age 59½ and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts. And unlike traditional 401(k)s, which currently require retirees to begin taking required minimum distributions after age 70½, Roth 401(k)s have no mandate to take withdrawals.
Not for everyone
A Roth 401(k) is more beneficial than a traditional 401(k) for some participants, but not all. For example, it may be valuable for employees who expect to be in higher federal and state tax brackets in retirement. Contact us if you have questions about adding a Roth 401(k) to your benefits lineup.
© 2019
Make a deductible IRA contribution for 2018. It’s not too late!
Do you want to save more for retirement on a tax-favored basis? If so, and if you qualify, you can make a deductible traditional IRA contribution for the 2018 tax year between now and the tax filing deadline and claim the write-off on your 2018 return. Or you can contribute to a Roth IRA and avoid paying taxes on future withdrawals.
You can potentially make a contribution of up to $5,500 (or $6,500 if you were age 50 or older as of December 31, 2018). If you’re married, your spouse can potentially do the same, thereby doubling your tax benefits.
The deadline for 2018 traditional and Roth contributions for most taxpayers is April 15, 2019 (April 17 for those in Maine and Massachusetts).
There are some ground rules. You must have enough 2018 earned income (from jobs, self-employment or alimony) to equal or exceed your IRA contributions for the tax year. If you’re married, either spouse can provide the necessary earned income. And you can’t make a deductible contribution to a traditional IRA if you were 70½ or older as of December 31, 2018. (But you can make one to a Roth IRA after that age.)
Finally, deductible IRA contributions are phased out (reduced or eliminated) if last year’s modified adjusted gross income (MAGI) is too high.
Types of contributions
If you haven’t already maxed out your 2018 IRA contribution limit, consider making one of these three types of contributions by the April deadline:
1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2018 tax return. If you or your spouse do participate in an employer-sponsored plan, your deduction is subject to the following MAGI phaseout:
- For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
- For a spouse who participated in 2018: $101,000–$121,000.
- For a spouse who didn’t participate in 2018: $189,000–$199,000.
- For single and head-of-household taxpayers participating in an employer-sponsored plan: $63,000–$73,000.
Taxpayers with MAGIs within the applicable range can deduct a partial contribution. But those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
2. Roth. Roth IRA contributions aren’t deductible, but qualified distributions — including growth — are tax-free, if you satisfy certain requirements.
Your ability to contribute, however, is subject to a MAGI-based phaseout:
- For married taxpayers filing jointly: $189,000–$199,000.
- For single and head-of-household taxpayers: $120,000–$135,000.
You can make a partial contribution if your 2018 MAGI is within the applicable range, but no contribution if it exceeds the top of the range.
3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions, you’ll only be taxed on the growth.
Act fast
Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making 2018 contributions and making the most of IRAs in 2019 and beyond.
© 2019
Still working after age 70½? You may not have to begin 401(k) withdrawals
If you participate in a qualified retirement plan, such as a 401(k), you must generally begin taking required withdrawals from the plan no later than April 1 of the year after which you turn age 70½. However, there’s an exception that applies to certain plan participants who are still working for the entire year in which they turn 70½.
The basics of RMDs
Required minimum distributions (RMDs) are the amounts you’re legally required to withdraw from your qualified retirement plans and traditional IRAs after reaching age 70½. Essentially, the tax law requires you to tap into your retirement assets — and begin paying taxes on them — whether you want to or not.
Under the tax code, RMDs must begin to be taken from qualified pension, profit sharing and stock bonus plans by a certain date. That date is April 1 of the year following the later of the calendar year in which an employee:
• Reaches age 70½, or
• Retires from employment with the employer maintaining the plan under the “still working” exception.
Once they begin, RMDs must generally continue each year. The tax penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.
However, there’s an important exception to the still-working exception. If owner-employees own at least 5% of the company, they must begin taking RMDs from their 401(k)s beginning at 70½, regardless of their work status.
The still-working rule doesn’t apply to distributions from IRAs (including SEPs or SIMPLE IRAs). RMDs from these accounts must begin no later than April 1 of the year following the calendar year such individuals turn age 70½, even if they’re not retired.
The law and regulations don’t state how many hours an employee needs to work in order to postpone 401(k) RMDs. There’s no requirement that he or she work 40 hours a week for the exception to apply. However, the employee must be doing legitimate work and receiving W-2 wages.
For a customized plan
The RMD rules for qualified retirement plans (and IRAs) are complex. With careful planning, you can minimize your taxes and preserve more assets for your heirs. If you’re still working after age 70½, it may be beneficial to delay taking RMDs but there could also be disadvantages. Contact us to customize the optimal plan based on your individual retirement and estate planning goals.
© 2019
It’s not too late: You can still set up a retirement plan for 2018
If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!
More benefits
Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.
If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.
And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.
3 options to consider
Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:
1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.
2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.
3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.
You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.
Sound good?
If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.
© 2018
FULL ARTICLE: Charitable IRA rollovers may be especially beneficial in 2018
If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions. This break may be especially beneficial now because of Tax Cuts and Jobs Act (TCJA) changes that affect who can benefit from the itemized deduction for charitable donations.
Counts toward your RMD
A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)
So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid to you.
Doesn’t require itemizing
You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation.
And, with the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.
Doesn’t have other deduction downsides
Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.
First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.
Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60% of your adjusted gross income for the year. (The TCJA raised this limit from 50%, but if the cash donation is to a private nonoperating foundation, the limit is only 30%.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.
A charitable IRA rollover avoids these potential negative tax consequences.
Have questions?
The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. So contact us to go over your particular situation and determine what’s right for you.
© 2018