IRA
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How to Make a Legit $28,000 IRA Contribution

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A colleague of mine said a 60-year-old couple who is a client of his just made a $28,000 IRA contribution. Is this some kind of new rule? I thought the maximum annual contribution was $6,000, with a potential additional $1,000 catch-up contribution for someone age 50 and over?

Highlights of Recommendations

  • A $28,000 IRA contribution for the couple is possible, courtesy of a combination of several IRS rules covering
  1. carry-back and current year contributions,
  2. spousal contributions and
  3. catch-up contributions.
  • From January 1, 2021 to May 17, 2021[1], it is potentially possible for a traditional or Roth IRA owner age 50 and over to make a $14,000 contribution: $7,000 as a 2020 carry-back contribution and $7,000 as a 2021 current-year contribution. That means a married couple filing a joint tax return could potentially make a $28,000 IRA contribution, with $14,000 going to each spouse’s respective IRA (either Roth or Traditional).
  • When making the contributions it is important to clearly designate to the IRA administrator that a portion is a carry-back contribution for 2020 and a portion is a 2021 current-year contribution in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution for 2021.
  • Such a large combined contribution would only be possible if
    • The couple had not previously made a 2020 contribution to a traditional or Roth IRA,
    • Each spouse was age 50 or older as of 12/31/2020,
    • The couple has earned income for 2020 and 2021 to support the contributions, and
    • For a Roth IRA contribution, the couple’s income is under the modified adjusted gross income (MAGI) limits for Roth IRA contribution eligibility (see below).
  • Whether the traditional IRA contributions would be tax deductible depends upon “active participation” of either spouse in a workplace retirement plan[2] and the couple’s MAGI.
  • Please see the applicable MAGI ranges in the following chart.
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married active participant filing a joint income tax return $105,000-$125,000 $104,000-$124,000
Single active participant $66,000-$76,000 $65,000-$75,000
Married active participant filing separate income tax return $0-$10,000 $0-$10,000
Spouse of an active participant $198,000-$208,000 $196,000-$206,000

Roth IRA Contribution Eligibility
Taxpayer Category 2021 MAGI Phase-Out Ranges 2020 MAGI Phase-Out Ranges
Married filing a joint income tax return $198,000-$208,000 $196,000-$206,000
Single individuals $125,000-$140,000 $124,000-$139,000
Married filing separate income tax return $0-$10,000 $0-$10,000

 

Conclusion

The deadline for making 2020 traditional or Roth IRA contributions is May 17, 2021. That means there is a window of opportunity that allows eligible couples to double up on IRA contributions (for 2020 as a carry-back contribution and one for 2021 as a current-year contribution) to the tune of $28,000.

 

 

[1] Usually, April 15th, but the IRS extended the 2020 tax filing deadline to May 17, 2021

[2] See Active Plan Participant and IRA Contributions

 

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Does the receipt of dividends on employer stock held in a 401(k) plan negate a lump sum distribution?

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“One of my clients is currently receiving quarterly dividend payments on employer stock he has in his 401(k) plan. Does the receipt of dividends on employer stock held in a 401(k) negate his ability to receive a lump sum distribution and, consequently, my client’s ability to take advantage of the special tax rules for net unrealized appreciation (NUA) in employer securities?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in New Jersey is representative of a common scenario involving participants with employer stock in a 401(k) plan.

Highlights of the Discussion

While payments of dividends are considered distributions for certain purposes (Temporary Treasury Regulation 1.404(k)-1T, Q&A3), the IRS has, in at least two private letter rulings (PLR 19947041 and 9024083[1]) concluded that such dividends are not treated as part of the “balance to the credit” of an employee for purposes of determining a lump sum distribution under IRC § 402(e)(4)(D). Therefore, such distributions do not prevent a subsequent distribution of the balance to the credit of an employee from being considered a lump sum distribution for NUA purposes if all other requirements are met.

For more information on the definition of lump sum distribution, please see RLC’s Case of the Week Lump Sum Distribution Triggers and NUA.

Conclusion

A participant’s receipt of dividends from employer stock held in a qualified plan do not prevent a subsequent distribution of the balance to the credit of the participant from being a lump sum distribution for NUA tax purposes.

 

[1] See www.legalbitstream.com

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Retiree Income is Higher Than We Thought

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By W. Andrew Larson, CPC

Trigger warning: This blog post highlights some good and, sadly, unheralded-news about retiree income, Social Security dependence and poverty among the elderly. If good new is upsetting to you please don’t continue.

Maybe you missed it but some good retirement-related news came out recently. It seems that retiree income is actually higher than previously thought, according to a study by the Social Security Administration (SSA) . In fact, according to the information, retiree income levels where quite a bit higher than reported in other studies. In this blog we will review these findings and explore why retiree income was undercounted according to the SSA. Our source of information is the study, Improving the Measurement of Retirement Income of the Aged Population.

This ORES Working Paper No. 116 published by Irena Dushi and Brad Trenkamp came out in January 2021.Before we dig into the data, it is important to understand the entities  involved with this study. As noted, the study was an “ORES” paper. ORES is the Office of Research, Evaluation and Statistics of the SSA. The paper was unique in that it compiled data from multiple sources to obtain as complete a picture of retiree income as is feasible. To date the most commonly used data on retiree income is published by the Census Bureau and is known as the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) . The ORES study extended the retiree income exploration beyond the ASEC data and included IRS database information along with the  Health and Retirement Study (HRS). Once the data was compiled a more complete view of retiree income was noted with clearly positive findings.

ORES compared the various data sets to determine if the ASEC study accurately captured retiree income sources and levels. When the multiple data sets were compared with the ASEC report it was apparent that certain retirement income sources were not being taken into account. Surprisingly, the missing income pieces included distributions from IRAs, qualified plans and pensions. When these elements were added to the calculations retiree income increased by about 30 percent . To quote the study “…[the study] showed that the difference in estimated income is mainly due to underreporting of retirement income (from both defined benefit pensions and defined contribution retirement account withdrawals) and that the discrepancy in median income between survey and administrative data increased from about 20 percent in 1990 to about 30 percent in 2012. This finding reveals that the discrepancy, attributable mainly to CPS’s failure to capture retirement account distributions, arose at a time when retirement accounts and withdrawals from such accounts became more prevalent.”

This makes sense; as time goes on, retirees will have had additional time to accumulate retirement assets in IRAs and qualified accounts and the gap should increase if changes in the ASEC methodology are not forthcoming.

The ORES data also demonstrates somewhat less dependency on Social Security retirement benefits. Policymakers have expressed concern over the numbers of retirees who have virtually no retirement income or assets other than Social Security benefits. Specifically, in the original ASEC report 26 percent of retirees receive at least 90 percent of their income from Social Security benefits. Once the additional retirement savings income is included, this number decreases to 12 percent−clearly a big improvement on the Social Security dependency issue.

Recall the original intent of the Social Security system was the reduction of poverty among the elderly. Under the study, if we look at the most expansive data set, the post-age-65 poverty rate is 7.1 percent. Certainly, by that standard, the system can claim success in reducing the poverty rate.

Retiree Income Range Percentage
Less than 5,000 0.8
5,000–9,999 3.6
10,000–14,999 5.5
15,000–19,999 5.6
20,000–24,999 5.6
25,000–29,999 5.3
30,000–34,999 5.2
35,000–39,999 5.8
40,000–44,999 4.7
45,000–49,999 4.3
50,000–74,999 18.2 62.7%
75,000–99,999 12.5
100,000 or more 23.0

Conclusion

In summary, the SSA’s ORES paper has provided positive insights into how retirees are faring from an overall income perspective. These figures illustrate the current retirement system’s ability to help most (nearly 63%, see above) workers create a reasonable-more than $40,000 per year- retirement income. The system is not perfect but it is increasingly effective at delivering adequate retirement outcomes to most workers. That said let’s not be complacent; we can do more to support workers efforts towards achieving retirement income security.  Initiatives could include more auto enrollment and escalation features, practical retirement and financial education and innovative retirement income products. Gloom and doom may sell media advertising but let’s take some comfort in the fact that the retirement system seems to be on a better path that we may have thought.

 

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Linking Student Loan Repayments and 401(k) Plan Contributions

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“I’m hearing more and more about 401(k) plans that allow participants to receive employer matching contributions based on their student loan payments. Is this permitted? What about the contingent benefit rule?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Colorado is representative of a common scenario involving 401(k) participants with student loan debt.

Highlights of the Discussion

According to the Federal Reserve, student loan debt has reached a staggering amount: $1.52 trillion. For many younger workers it has become a huge stumbling block to achieving financial wellness, including saving for retirement. A new in-plan approach to addressing student loan debt is to provide some kind of loan repayment incentive through the employer’s 401(k) plan. The industry has been hearing more and more about such arrangements, especially following an IRS private letter ruling (PLR) issued in 2018 to Abbott Laboratories and new proposed legislation in 2020.

PLR 201833012 cracked open the door to encourage retirement savings by those saddled with student loan debt. In the method approved by the IRS in the PLR’s scenario, an employee with student loans was be able to enroll in his employer’s 401(k) plan, make monthly student loan payments to the loan servicer outside of the plan, and have his employer make “student loan repayment nonelective contributions” into the employee’s 401(k) retirement account that “matched” the participant’s loan payment, up to a certain amount.  Since the nonelective contribution was not contingent upon making employee salary deferrals, the plan did not violate the “contingent benefit” prohibition of Treasury Regulation §1.401(k)-1(e)(6).  The contingent benefit rule prohibits conditioning the receipt of other employer-provided benefits on whether an employee makes employee elective salary deferrals. Receiving matching contributions is the sole exception to this rule. The PLR did not address whether the plan meets other qualification requirements under IRC Sec. 401(a).

A PLR may not be relied on as precedent by other taxpayers. Consequently, while the interest of plan sponsors is there to use their companies’ 401(k) plans to help employees reduce student loan debt and improve financial wellness, and a few companies have stuck their toes in the water, the general uncertainty of how the feature would affect a plan’s overall qualified status in the eyes of the IRS still hinders its widespread adoption.

To help curb employer reticence, there is currently a proposal before Congress entitled the Securing a Strong Retirement Act of 2020 that includes Section 109: Treatment of student loan payments as elective deferrals for purposes of matching contributions. Under the bill, an employer would be permitted to make matching contributions under a 401(k) plan, 403(b) plan, or Savings Incentive Match Plan for Employees (SIMPLE) IRA plan with respect to “qualified student loan payments,” the definition of which is broadly defined as any indebtedness incurred by the employee solely to pay “qualified higher education expenses” of the employee. Similarly, governmental employers would also be permitted to make matching contributions in a 457(b) plan or another plan with respect to such loan repayments. This would essentially treat an employee’s student loan payment as an elective deferral.

Regardless of what happens to SECURE Act 2.0, the IRS has made guidance on the connectivity of student loan payments and qualified retirement plans (including 403(b) plans) at top priority for 2021.[1]

Conclusion

Employers are focusing on employee financial wellness, including adopting measures to help alleviate student loan debt and encourage retirement savings. One enticing option that advances both goals, potentially, is linking student loan repayments with 401(k) plan contributions. The industry can anticipate more guidance in 2021—whether in the form of new Treasury Regulations or federal law.

[1] IRS 2021 Priority Guidance Plan

 

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