Garland Law Offices, P.A.

The SECURE Act and Your Retirement

“While most of us had stockings and menorahs on our minds, President Trump on Dec. 20 signed the Secure Act that makes the most significant changes in retirement accounts we’ve seen in years.”

For anyone who has saved a high six- or seven-figure balance in their retirement accounts, the SECURE Act will definitely affect their retirement plans. That includes 401(k)s, 403(b)s, and other workplace plans, as well as traditional IRAs and Roth IRA accounts. The article “How the new Secure Act affects your retirement” from the Daily Camera provides a clear picture of the changes.

Stretch IRAs are Curtailed. Anyone who inherited an IRA (traditional or Roth) from a parent before 2020, may take Required Minimum Distributions (RMDs) from those accounts over their own life expectancy. Let’s say a parent died when you were 48—you could stretch those distributions out over the course of 36 years. This option gave heirs the ability to spread income and the taxes that come with the income out over decades—with little distributions having little impact on taxes. If you inherited a Roth IRA, you could benefit from its tax-free growth over your entire lifetime.

All that’s changed now. A non-spousal heir (or one who is disabled, chronically ill or a minor child) now has ten years in which to take their distributions. They have to pay ordinary income taxes on the amount they take out, over a far shorter period of time. Newly inherited Roth IRAs have the same rules, but usually there are no taxes due. If a minor inherits an IRA, once they reach the age of majority, they have ten years in which to take their distributions.

A Small Break for Required IRA Distributions. Until the SECURE Act, retirees had to start taking their RMDs out of IRAs soon after turning 70½. The new age for taking RMDs is now 72 for those who are younger than age 70½ at the end of 2019. This won’t alter the plans of most retirees, since they usually start taking those distributions well before age 72 to cover expenses. Roth IRAs have another benefit: they continue to escape distribution requirements, unless they are inherited.

No Age Cap for Traditional IRA Contributions. Workers may now continue to contribute funds into a traditional IRA at any age. Before the SECURE Act, workers had to stop contributing funds once they turned 70½. Note that you or your spouse are still required to have earned income to put funds in a traditional or Roth IRA.

Other Changes. There are many more changes from the SECURE Act and thought leaders in the estate planning community will be reviewing and analyzing the law for months, or perhaps years, to come. Some of the changes that are widely recognized already include the ability to withdraw $5,000 penalty-free from retirement plan accounts per newly born or adopted child, although in most cases, income tax will need to be paid on the withdrawal.

Section 529 educational savings accounts can be used, up to a lifetime limit of $10,000 per student, to pay off student loans. In most states, this will be considered a non-qualified withdrawal and state income taxes will be due, but at least the money can be used for this purpose.

Lastly, there are new tax credits available to smaller companies that set up new retirement plans, and there are new rules regarding including part-time employees in company sponsored 401(k) plans.

The changes from the SECURE Act, particularly regarding the loss of the IRA Stretch, have created a need for people to review their estate plans, if they included leaving large retirement accounts to their children. Speak with your estate planning attorney to ensure that your plan still works.

Reference: Daily Camera (Jan. 11, 2020) “How the new Secure Act affects your retirement”

What’s Your Retirement Distribution Plan?

“Failing to withdraw a required minimum distribution (RMD) from your own or an inherited IRA by the deadline results in a big tax code penalty: 50%. That's right.”

If you were supposed to take out an RMD of $4,000 from your retirement accounts and somehow forgot to do this, you’ll be writing the IRS a check for $2,000. Ouch! This is something you can easily avoid, says Yahoo Finance’s article “Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS.”

Most investors spend a lot of time building their retirement income accounts—their entire working life. However, there’s a second phase of retirement finances that doesn’t get quite as much attention. That’s the “distribution” phase, when the money that you put into accounts for decades needs to be taken out and used for what is ideally an enjoyable retirement.

Preparations for this phase are usually focused on where to live, how much travel you can afford, what interests you may pursue and the choices that are made regarding retirement spending.

With those choices come some fixed payments that you need to keep in mind as you budget. The IRS has rules about Required Minimum Distributions, or RMDs, that are strict. While some of the rules changed as of January 1, 2020, the penalties have not. Starting at age 72, you have to take your RMDs, or pay a steep price.

Here are the main types of accounts that have RMDs: IRAs, 401(k)s, 457 plans, SEPs, SIMPLE IRAs, TSP, 403(b)s, and TSAs. They all require RMDs in retirement.

The first distribution must be taken by April 1 of the year following the calendar year that you turn 72. If you retire after age 72, you have to take your first RMD from your 401(k), profit-sharing 403(b) or other defined contribution plan by April 1 of the year after the calendar year in which you retire.

For subsequent years after your required beginning date, you have to take your RMD by December 31.

You don’t have to take any RMDs for Roth IRA accounts, since those accounts are funded by post-tax dollars. There are Roth retirement accounts that do have RMDs, like a Roth 401(k). Some people roll their Roth 401(k) into a Roth IRA and pay the taxes at the time of the rollover, anticipating high taxes in the near future.

If you don’t take your RMD, or don’t take a large enough distribution, the IRS penalty is 50% of the amount that was not withdrawn.

To calculate your RMD for 2020, divide your retirement account balance on December 31, 2019, by a “distribution period” factor based on your age. For example, Lisa Sue is 71 and must take her first distribution at age 72. Her year-end IRA balance for the prior year was $100,000. Her distribution factor is 27.4. Divide $100,000 by 27.4 and the amount of the RMD is $3,649.63. That’s her RMD.

Understanding the distribution phase of your retirement is as important as the savings phase. While you’re planning, don’t neglect the estate plan that needs to be updated or prepared. That includes a will, power of attorney, medical power of attorney and other documents. Talk with an experienced estate planning attorney to create a plan to protect yourself and your loved ones.

Reference: Yahoo Finance (Jan. 9, 2020) “Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS”

What are the Advantages of a 457(b) Retirement Plan?

“Like its better-known sibling—the 401(k)—a 457(b) retirement plan is a tax-advantaged way to save for retirement. However, the 457(b) is designed especially for employees of state and local governments, as well as a few tax-exempt organizations. (If you’re employed by the federal government, however, you have access to a thrift savings plan rather than a 457(b) plan.)”

The 457(b) retirement plan has many advantages for government workers, like tax-free growth of their savings. Bankrate’s recent article, “Pros and cons of government 457(b) retirement plans,” explains how the 457(b) plan works.

A 457(b) is similar to a 401(k), in that it lets employees deposit money in a special retirement account that provides tax advantages, letting savings grow tax-free over time. You can only defer a certain dollar amount each year, and the amount you can defer is linked to the cost-of-living (indexes), like the 401(k). Similar to the 401(k) program, which has both a pre-tax and an after-tax Roth version, 457(b) plans may also offer these two versions of the retirement plan.

The major difference between the two is that the pre-tax plan lets you contribute money and take a tax deduction today, and then at retirement you’ll pay taxes when you take money out of the account.  However, the Roth version of the 457(b) lets you put in money after-tax–paying taxes on the contributions today–but you won’t have to pay tax on any withdrawals at retirement.

A key difference in 457(b) plans is that 457(b) plans also may allow employees to save extra money, beginning three years before the “normal retirement age” (which is specified in the plan). In each of those three years, employees can contribute twice the normal elective deferral limit or the sum of the current year’s ceiling, plus unused portions from prior years, whichever is less.

When it comes to withdrawing funds early, 457(b) plans make it difficult to withdraw money in an emergency. A 457(b) plan can only make hardship distributions, if the participant has no other resources available. Then, if you take a distribution from the 457(b), you’d be required to stop making deferrals for a certain period of time.

In a 401(k) plan, if you needed money to buy a house or to pay tuition for a dependent, you could. However, in the 457 plan, those kinds of foreseeable withdrawals aren’t permitted. It must be something catastrophic. The distributions to workers who retire early are less taxing. Those distributions before age 59½ from 457(b) plans aren’t subject to the 10% penalty that 401(k) plans are.

Even if you have any of these accounts, you can still start an IRA, which provides more retirement benefits.

Reference: Bankrate (July 19, 2019) “Pros and cons of government 457(b) retirement plans”

Will the RMD Age Be Raised by New Legislation?

“Sens. Ben Cardin, D-Md., and Rob Portman, R-Ohio, reintroduced legislation late Monday that would raise the required minimum distribution age from 70 ½ to 75 and also help workers pay off their student loans.”

Senator Ben Cardin and Rob Portman’s Retirement Security and Savings Act of 2019 overlaps with some provisions in the Retirement Enhancement and Savings Act (RESA) of 2019. That bill was introduced on April 1, but RESA only raised the RMD age to 72.

Think Advisor reports in the article “New Retirement Bill Would Boost RMD Age to 75” that the RESA bill, which was introduced by Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., is similar to H.R. 1994, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The latter bill is expected to get a vote on the House floor very soon.

The Portman-Cardin bill phases in the RMD age increase over several years. The bill would also update mortality tables to reflect longer life expectancies.

The bill would also broaden the ability of employer-sponsored 403(b) plans to offer collective investment trusts (CITs). A CIT is a mutual fund-like vehicle used in some 401(k)s and pension plans that can help plan sponsors save on expenses.

The Insured Retirement Institute, a lobbying group for the annuity industry, added its support for the bill.

“Section 117 [of the bill] would level the playing field, by providing insurance products with the same exemptions as CITs,” the group said in a letter to senators, sparking “a robust and competitive marketplace which is vital to ensure Americans have access to the appropriate savings option for their financial situation.”

The bill would also let those with Roth accounts in 457(b), 401(k), 401(a), and 403(b) plans roll Roth IRA assets into these plans. It would also allow 457(b), 401(a), 401(k) and 403(b) plan participants to make qualifying charitable distributions. Right now they are only allowed from IRAs.

Reference: Think Advisor (May 14, 2019) “New Retirement Bill Would Boost RMD Age to 75”

Will the RMD Age Be Raised by New Legislation?

“Sens. Ben Cardin, D-Md., and Rob Portman, R-Ohio, reintroduced legislation late Monday that would raise the required minimum distribution age from 70 ½ to 75 and also help workers pay off their student loans.”

Senator Ben Cardin and Rob Portman’s Retirement Security and Savings Act of 2019 overlaps with some provisions in the Retirement Enhancement and Savings Act (RESA) of 2019. That bill was introduced on April 1, but RESA only raised the RMD age to 72.

Think Advisor reports in the article “New Retirement Bill Would Boost RMD Age to 75” that the RESA bill, which was introduced by Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., is similar to H.R. 1994, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The latter bill is expected to get a vote on the House floor very soon.

The Portman-Cardin bill phases in the RMD age increase over several years. The bill would also update mortality tables to reflect longer life expectancies.

The bill would also broaden the ability of employer-sponsored 403(b) plans to offer collective investment trusts (CITs). A CIT is a mutual fund-like vehicle used in some 401(k)s and pension plans that can help plan sponsors save on expenses.

The Insured Retirement Institute, a lobbying group for the annuity industry, added its support for the bill.

“Section 117 [of the bill] would level the playing field, by providing insurance products with the same exemptions as CITs,” the group said in a letter to senators, sparking “a robust and competitive marketplace which is vital to ensure Americans have access to the appropriate savings option for their financial situation.”

The bill would also let those with Roth accounts in 457(b), 401(k), 401(a), and 403(b) plans roll Roth IRA assets into these plans. It would also allow 457(b), 401(a), 401(k) and 403(b) plan participants to make qualifying charitable distributions. Right now they are only allowed from IRAs.

Reference: Think Advisor (May 14, 2019) “New Retirement Bill Would Boost RMD Age to 75”

What Are Some Common IRA Rollover Mistakes?

“IRA rules can be tricky, and some have even changed over the years. Therefore, you need to be careful or you could pay income tax and penalties.”

If you’re considering rolling your traditional IRAs from one financial institution to another, Investopedia’s article, “Common IRA Rollover Mistakes” provides an overview of IRA rollover rules and how to avoid breaking them.

The 60-Day Rule. After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. That’s 60 days, not two months. If you don’t complete the rollover within the time allowed or don’t get a waiver or extension of the 60-day period from the IRS, the amount will be treated as ordinary income. You’ll have to include the amount as income on your tax return, and any taxable amounts will be taxed at your current, ordinary income tax rate. In addition, if you weren’t 59½ years old when the distribution occurred, you'll have a 10% penalty on the withdrawal.

One-Year Waiting Rule. For one year after you distribute assets from your IRA and roll over any part of that amount, you can’t make another tax-free rollover of any IRA. This doesn’t apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b) or 457(b) account within a year. This one-year limit also doesn’t apply to rollovers from Traditional IRAs to Roth IRAs (“Roth conversions”).

Let’s look at some common IRA rollover mistakes:

Your RMDs Aren’t Eligible for Rollover. You’re allowed to make tax-free rollovers from your IRAs at any age. However, if you’re 70½, or older, you can’t roll over your annual required minimum distribution (RMD), since it would be considered an excess contribution. If you’re required to take an RMD each year, be certain to remove the current year’s RMD amount from your IRA before starting the rollover.

Same Property Rule. Your rollover from one IRA to another IRA must be with the same property. You can’t take cash distributions from your IRA, purchase other assets with the cash, then roll over those assets into a new (or the same) IRA. If you do, the IRS would consider the cash distribution from the IRA as ordinary income.

You can roll over funds from any of your own traditional IRAs. You can also roll over funds to your traditional IRA from a traditional IRA you inherit from your deceased spouse, a qualified plan, a tax-sheltered annuity plan, or a government deferred-compensation plan (section 457 plan).

If the rollover eligible amounts from qualified plans, 403(b) plans, or governmental 457 plans are paid to you rather than being processed as a direct rollover to an eligible retirement plan, the payor must withhold 20% of the amount distributed to you. You’ll get credit for the taxes that were withheld, but if you decide to roll over the total distribution, you’ll need to make up the 20% out of pocket. If you want to avoid the withholding and the reporting requirements, a direct rollover should be used to effectuate your rollover from your qualified plan, 403(b) plan, or governmental 457 plan account. A direct rollover is reportable, but not taxable. There’s also no 60-day window. Ask your plan administrator and IRA custodian about their documentation and operational requirements for processing a direct rollover on your behalf.

You might also be able to move funds in the other way: you may be able to take a distribution from your IRA and roll it into a qualified plan. Your employer isn’t required to accept these rollovers, so ask your plan's administrator before you distribute the assets from your IRA. Certain amounts, such as nontaxable amounts and RMDs, can’t be rolled from an IRA to a qualified plan.

Reference: Investopedia (March 29, 2018) “Common IRA Rollover Mistakes”

New Tax Law has Big Changes for 529 Accounts and ABLE Plans

“Changes in the tax reform law can provide entirely new strategies for planning for all levels of education.”

Think Advisor’s recent article, “Investing in 529, ABLE Plans? Better Check Tax Law Changes,” says that the tax reform passed at the end of 2017 made important changes to educational 529 and 529 ABLE plans. The 2017 Tax Act expanded Section 529 plans, to include the use of up to $10,000 per year for elementary or secondary school expenses.

The new law will also let Section 529 plan funds be rolled over into an ABLE account for the designated beneficiary or the designated beneficiary’s family member, in an amount up to the annual 529 plan contribution limit. (These rollovers would offset other contributions made to the ABLE account for the year.) Any amounts rolled over in excess of the limitation are included in the distributee’s gross income when they’re distributed. These rules are effective for rollovers that happen after December 31, 2017 and before January 1, 2026.

The new rules for elementary and secondary school expenses could mean that some people may want to open a second Section 529 plan for K-12 school expenses.  However, the $10,000 amount applies on a per-student basis and not a per-Section 529 account basis. Therefore, if the student is a beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all accounts. Anything over the $10,000 will be taxable.

ABLE accounts also underwent some significant changes with the 2017 Tax Act. The new law expanded ABLE account contribution rules, so that the account beneficiary can now contribute his or her earned income, even if the contribution (when added to other contributions) results in the contribution levels going over the annual contribution limit (which is tied to the annual gift tax exclusion amount: $15,000 for 2018).

The account beneficiary’s contribution is limited to the lesser of her income or the federal single-person poverty limit.  However, this additional contribution limit isn’t available to account beneficiaries, who also contributed to a 401(k), 403(b) or 457(b) plan. If the ABLE account beneficiary contributes to the account, she’ll be eligible for the saver’s credit. This applies for tax years beginning after December 31, 2017 and before January 1, 2026.

Reference: Think Advisor (April 17, 2018) “Investing in 529, ABLE Plans? Better Check Tax Law Changes”