Tag Archive for: distributions

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Distributions Affect Saver’s Tax Credit

“My client wants to claim a Saver’s Tax Credit for 2022 but has taken some distributions in the past. Will those withdrawals affect the amount of credit for which he will qualify?”

ERISA consultants at the Retirement Learning Center 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 an advisor in Rhode Island is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

This is a very important tax question for which your client should seek specific tax advice. Generally, yes, the amount of any contribution eligible for the Saver’s Credit is reduced by certain withdrawals taken for the last three years (See IRS Announcement 2001-106, Q&As 4 and 5). For example, for 2022 tax filings, distributions your client (and his spouse, if filing jointly) took after 2019 and before the due date of their 2022 tax return (including extensions) from the following types of plans will lower the credit amount:

  • Traditional IRAs,
  • Roth IRAs,
  • Achieving a Better Life Experience (ABLE) accounts,
  • 401(k) plans,
  • 403(b) plans,
  • Governmental 457(b) plans,
  • IRS Sec. 501(c)(18)(D) trusts created before June 25, 1959, to pay pension benefits,
  • Qualified plans under IRC Sec. 401(a),
  • Qualified annuities under IRC Sec. 403(a),
  • Simplified Employee Pension (SEP) IRA plans,
  • Savings Incentive Match Plans for Employees (SIMPLE) IRA plans,
  • the Federal Thrift Savings Plan (Federal TSP).

However, they should not count distributions

  • That are not taxable as the result of a rollover or a trustee-to-trustee transfer,
  • That are taxable as the result of an in-plan rollover to a designated Roth account,
  • From an eligible retirement plan (other than a Roth IRA) rolled over or converted to a Roth IRA,
  • That are loans from a qualified employer plan treated as a distribution,
  • Of excess contributions or deferrals (and income allocable to such contributions or deferrals),
  • Of contributions made to an IRA during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year,
  • Of dividends paid on stock held by an employee stock ownership plan,
  • From a military retirement plan (other than the Federal TSP) or
  • From an inherited IRA by a nonspousal beneficiary.

Your client and his tax advisor can read details of the credit in IRS Form 8880, Credit for Qualified Retirement Savings Contributions instructions and here Saver’s Credit.

Currently, the credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions capped at $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040N (making the maximum credit $1,000 or $2,000 if married filing jointly);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • SIMPLE IRA,
  • SARSEP,
  • 403(b),
  • Governmental 457(b),
  • Federal Thrift Savings Plan,
  • ABLE account* or
  • Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).

In general, the contribution tax credit is available to individuals who

  1. Are age 18 or older;
  2. Not a full-time student;
  3. Not claimed as a dependent on another person’s return; and
  4. Have income below a certain level (i.e., for 2022 tax filings, the amount on Form 1040, 1040-SR, or 1040-NR, line 11, is $34,000 or less ($51,000 if head of household, or $68,000 if married filing jointly).

2022 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $41,000 AGI not more than $30,750 AGI not more than $20,500
20% of your contribution $41,001- $44,000 $30,751 – $33,000 $20,501 – $22,000
10% of your contribution $44,001 – $68,000 $33,001 – $51,000 $22,001 – $34,000
0% of your contribution more than $68,000 more than $51,000 more than $34,000

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify. Seeking qualified tax advice is essential to ensure accurate calculations.

 

 

 

 

 

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“How did beneficiary distribution options change under the SECURE Act?”

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 from Massachusetts is representative of a common inquiry related to beneficiary distribution options.

Highlights of the Discussion

The Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that Congress added to the Further Consolidated Appropriations Act, 2020, affected the distribution options for retirement plan beneficiaries in 2020 and beyond. The changes are summarized in the charts below.

Beneficiary Changes under the SECURE Act

Applies to distributions with respect to individuals who die after December 31, 2019

Refer to the terms of the plan or IRA agreement for specify options.

Type of Beneficiary Definition Distribution Options
Eligible Designated Beneficiary (EDB)
  • Spouse
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the employee (or IRA owner), or
  • Children of the employee (or IRA owner) who have not reached the age of majority
Terms of the plan or IRA agreement will specify, but  generally:

Death before required beginning date (RBD)

•     Five-year rule

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse beneficiary only)

•     Rollover

  • Spouse EDB may roll over his or her share from an IRA or qualified plan into his/her own IRA or eligible plan
  • Non-spouse EDB may roll over his or her share of an employer plan to a beneficiary IRA

Death on or after RBD

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse EDB only)

•     Rollover (see above)

Noneligible Designated Beneficiary (Non-EDB) Nonspouse beneficiaries who do not qualify as an EDB as listed above (e.g., child who has reached the age of majority) Terms of the plan or IRA agreement will specify, but generally:

•     Timing of death does not matter (i.e., no before or after RBD differentiation)

•     10-year rule—account depleted within 10 years of death

•     Lump sum

•     Rollover−nonEDB may roll over his or her share of an employer plan to a beneficiary IRA, but payout remains subject to 10-year rule

 

Estate or nonqualified trust as beneficiary Nonperson beneficiaries Death before RBD

•   Lump sum

•   Five-year rule

Death on or after RBD

•   Lump sum

•   Single life expectancy payments

 

Qualified trust as beneficiary with underlying EBD A qualified trust is one that meets the following requirements of Treas. Reg. 1.401(a)(9)-4, Q&A 5(b).

1.   The trust is valid under state law,

2.   The trust is irrevocable (either during the IRA owner or plan participant’s

life or becomes so at his or her death),

3.   The trust has identifiable beneficiaries, and

4.   The trustee of the trust provides the IRA or plan administrator with a copy of the trust instrument (or qualifying trust documentation) by October 31 of the year following the year of the IRA owner or plan participant’s death.

EDB—See above

Death before RBD

·    Lump sum

·    Five-year rule

·    Single life expectancy payments

Death on or after RBD

·     Lump sum

·     Single life expectancy payments

·      Rollovers-

  • Spouse EDB rollover only allowed with private letter ruling
  • Nonspouse EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary
Qualified trust as beneficiary with underlying Non-EDB Qualified trust—See above

Non-EDB—See above

Timing of death does not matter (i.e., no before or after RBD differentiation

•   10-year rule

•   Lump sum

•   Rollover−Non-EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary, but payout remains subject to 10-year rule

© Copyright 2024 Retirement Learning Center, all rights reserved