Tag Archive for: IRA

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Year-End Tax Reminders

A recent call with a financial advisor in Pennsylvania is representative of a common inquiry involving year-end tax-related deadlines. The advisor asked: “Of what year-end tax deadlines should I remind my clients?”

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.

Highlights of the Discussion
There are several December 31, 2023, deadlines of which employers, retirement plan participants, IRA owners and other savers should be aware. The list below includes several but is by no means exhaustive. And—because December 31 falls on a Sunday this year, conservatively these actions should be completed by Friday December 29th to ensure they are completed no later than December 31st. 1

  • 2023 Roth conversion: In order for a taxpayer to consider either a Roth IRA or Roth 401(k) in-plan conversion for 2023 tax purposes, he or she must complete the conversion no later than December 31, 2023. (Don’t confuse the 2023 conversion deadline with the deadline for making a 2023 Roth IRA contribution, which is April 15, 2024.)
  • 2023 Qualified Charitable IRA Distribution: No later than December 31st, IRA owners and beneficiaries age 70½ or over can transfer up to $100,000 from their IRAs to an eligible charity, and exclude the amount from gross income. The excluded amount also can be used to satisfy any required minimum distributions that are due from their IRAs for 2023. New for 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. See a prior Case of the Week “There’s More to Love About QCDs” for other enhancements to QCDs as a result of SECURE Act 2.0.
  • 2023 Required minimum distributions for second or subsequent distribution years: Plan participants and IRA owners who have begun their required minimum distributions must take their second or subsequent years’ RMDs no later than December 31, 2023—or, potentially, face a 25% penalty on the amount not taken.
  • Discretionary Plan Amendments: Plan sponsors with calendar-year plans that made discretionary operational changes to their retirement plans during the year must generally amend their plan documents to reflect such changes no later than December 31, 2023.
  • Deferral Election: Though not a requirement, plan participants will want to make sure their employee salary deferral elections are properly set for the beginning of 2024.
  • Beneficiary Audits: Although there is no prescribed deadline, plan participants and IRA owners should make it a habit to review their beneficiary elections at least annual to ensure they are up to date.
  • 529 Plan Contribution: Although contribution rules vary by states, many states have a contribution deadline of the end of the calendar year (December 31) to qualify for a 529 education savings plan tax deduction on their tax returns for the tax year.

Conclusion
Before the New Year’s Eve celebration begins, individuals should check with their tax advisors to see if December 31, 2023, marks the deadline for important 2023 tax-related actions like those listed above. Happy Holidays!

1 When a particular act is tied to a prescribed IRS filing deadline there is an exception. In that circumstance, if the due date falls on a Saturday, Sunday, or legal holiday, then the due date is the next business day (IRC Sec. 7503).

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The Dos and Don’ts of Aggregating Required Minimum Distributions

“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

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 an advisor in Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the amount not taken).

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Don’t Forget About the Benefits of a Qualified Charitable Distribution for 2022

“I have an 84-year-old client with a multi-million dollar IRA.  As you can well image, his required minimum distribution (RMD) for the year is quite large. Do you have any suggestions on how he might reduce the tax impact of such a large RMD?”

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 Illinois is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, the first idea that comes to mind is making a qualified charitable distribution (QCD) by December 31, 2022. A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.”(The IRA owner cannot have received the amount.) QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • What are the benefits of making a QCD? Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD
    • Is excludable from taxable income (up to $100,000),
    • May count towards the individual’s RMD for the year,
    • May lower taxable income enough for the person to avoid paying additional Medicare premiums and
    • Is a philanthropic way to support a favored charity.
  • Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.*
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • Generally, qualifying charitable organizations include those described in 170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).

Conclusion

Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.

* Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040).  See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information

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IRS as Creditor

Is the account balance of a 401(k) plan participant protected from an IRS tax levy?

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 an advisor in Alabama is representative of a common inquiry involving 401(k) plans and IRS tax levies.

Highlights of Discussion

Unfortunately, no it is not. If the participant has an unpaid tax liability the IRS has the authority to levy against his or her 401(k) plan account balance [ Reg. § 1.401(a)-13(b)(2)].  In fact, any qualified retirement plan or IRA [including traditional, Roth, savings incentive match plan for employees (SIMPLE) or simplified employee pension (SEP) plan IRAs] may be subject to an IRS tax levy.

11.6.3 of the IRS’s Internal Revenue Manual (IRM) provides instructions and strict procedures when an IRS tax levy involves assets in retirement plans (as opposed to retirement income under 5.11.6.2 of the IRM). The IRM instructs agents to levy on retirement accounts only after considering the following questions.

1) Does the taxpayer have property other than retirement assets that may be available for collection first?

2) Has the taxpayer exhibited “flagrant” conduct? (See example next.)

EXAMPLE:  Jake, who has an outstanding tax liability with the IRS, continues to make voluntary contributions to retirement accounts while asserting his inability to pay the amount he owes to the IRS.   The IRS could deem this conduct as flagrant.

3) Are the retirement plan assets  necessary to cover the tax payer’s essential living expenses?

4) Does the taxpayer have “present rights” to receive the retirement plan assets?

EXAMPLE:  Amanda has money in a 401(k) plan, but cannot withdraw it until she experiences a distribution triggering event as listed in the plan document. An IRS levy may identify her 401(k) plan balance, but the money cannot be paid over until Amanda can withdraw it under the terms of the plan.

Logistically, the IRS will use Form 668-R, Notice of Levy on Retirement Plans for levying retirement plan assets.  When money is withdrawn from a retirement account to satisfy an IRS levy the taxpayer would include any pre-tax amounts in his or her taxable income for the year. Fortunately, an exception to the 10% additional tax on early distributions for taxpayers under age 59 ½ applies if the money was withdrawn because of a notice of levy served on the retirement account.

Conclusion

In most cases, 401(k) plan assets are protected from creditors—unless the creditor is the IRS.  However, IRS agents are instructed to levy against retirement plan assets only as a last resort.  Any taxpayer addressing an IRS tax levy should seek guidance from an experienced tax professional or attorney experienced in this area.

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Remember the Saver’s Tax Credit

“Can you remind me of the special tax credit available for individuals who make retirement savings contributions, please?”

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 Nevada is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

Absolutely, after all, it is tax time! IRA owners, retirement plan participants (including self-employed individuals) and others may qualify for the IRS’s “Saver’s Credit” for certain contributions made to eligible savings arrangements. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040NR);
  • 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),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (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 (see table that follows).

* The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from ABLE accounts can help designated beneficiaries pay for qualified disability expenses on a tax-free basis.

2021 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750
20% of your contribution $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500
10% of your contribution $43,001 – $66,000 $32,251 – $49,500 $21,501 – $33,000
0% of your contribution More than $66,000 More than $49,500 More than $33,000

*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.

 

 

 

 

 

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Is Congress Closing the Backdoor to Roth IRAs?

An advisor asked: “Is Congress Closing the Backdoor to Roth IRAs?”

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 California is representative of a common inquiry related to Roth conversions.

Highlights of the Discussion
Potentially, yes, as well as restricting other Roth conversion strategies. As part of the tentative measures to help fund the proposed $3.5 trillion budget reconciliation package (a.k.a., Build Back Better Act ), the House Ways and Means Committee has suggested, among other tactics, restricting “back-door Roth IRAs,” a popular tax-reduction strategy where individuals convert traditional IRA and/or retirement plan assets to Roth IRAs. If enacted as proposed, after-tax IRA and after-tax 401(k) plan conversions would be eliminated after 12/31/2021. For amounts other-than after-tax (i.e., pretax assets), traditional IRA and plan conversions for taxpayers who earn over the following taxable income thresholds would cease after 12/31/2031:

• Single taxpayers (or taxpayers married filing separately) with AGI over $400,000,
• Married taxpayers filing jointly with AGI over $450,000, and
• Heads of households with AGI over $425,000 (all indexed for inflation).

The buildup of Roth assets can be a source of tax-free income later if certain conditions are met. Ending Roth conversions using after-tax contributions in a defined contribution plan or IRA, and restricting Roth conversions of pre-tax plan or IRA assets would materially limit many taxpayers’ ability to accumulate Roth assets in a tax-free or tax-reduced manner.
You won’t find the phrase backdoor Roth IRA in the Internal Revenue Code or Treasury regulations. Nor is it a specific product, but the industry has known about the phenomena for years. A backdoor Roth IRA is merely a series of transactions or steps an individual can take to have a Roth IRA—regardless of income level. While initially poorly understood and lacking clear IRS guidance, so called “back-door Roth IRAs” have been legitimized over the years by the IRS.

The ability to make a 2021 Roth IRA contribution is phased out and eliminated for single tax filers with income between $125,000-$140,000; and for joint tax filers with income between $198,000-$208,000. Consequently, if a person earns too much, he or she cannot make a Roth IRA contribution directly (i.e., through the front door). But many can still take another route—by converting traditional IRA or qualified retirement plan assets, a transaction that has become known as the backdoor Roth IRA.

Congress repealed any income limitations for Roth IRA conversions in 2010. Consequently, regardless of income level, anyone could fund a Roth IRA through a conversion. For example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she could contribute amounts (deductible or nondeductible) to a traditional IRA based on earned income and, shortly thereafter, convert the contribution from the traditional IRA to a Roth IRA. Similarly, a person with a 401(k)-plan account balance could convert eligible plan assets either in-plan to a designated Roth account (if one exists) or out-of-plan to a Roth IRA through a plan distribution. Assets that are taxable at the point of conversion would be included in the individual’s taxable income for the year. Going forward, earnings would accumulate tax-deferred and, potentially, would be tax-free upon distribution from the Roth IRA. Under the authority of IRS Notice 2014-54, a qualified plan participant can rollover pre-tax assets to a traditional IRA for a tax-free rollover and direct any after-tax assets to a Roth IRA for a tax-free Roth conversion.

Conclusion
Plan participants and IRA owners need to be aware that as part of the 2021 budget reconciliation process, the ability to convert assets to Roth assets may be sunsetting. If revenue-generating provisions of the Build Back Better Act are enacted as currently proposed, Roth conversions of after-tax IRA and after-tax 401(k) plan assets would be eliminated after 12/31/2021; and Roth conversions of pre-tax IRA and plan assets would cease after 12/31/2031.

Click here for an RLC webinar on the proposed changes.

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When Are Retirement Assets Protected from Creditors?

An advisor asked: “Can you give me a refresher on the creditor protection rules for retirement plan assets at the federal and state levels?”

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 an advisor in Minnesota is representative of a common question on creditor protection for retirement plan assets.

Highlights of the Discussion
• The level of creditor protection for retirement plan assets depends on

1) the type of plan assets, and

2) whether the owner of the assets has filed for bankruptcy and, if not, the governing laws of the state with jurisdiction over the assets.

• The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), effective October 17, 2005, clarified the level of creditor protection for retirement plan assets when the owner has filed for bankruptcy.

Bankruptcy
• BAPCPA amended Section 522 of the Bankruptcy Code to exempt from a debtor’s bankruptcy estate retirement assets that are held in

– IRC Sec. 401(a) plans (e.g., 401(k), defined contribution and defined benefit plans);
– 403(b) plans,
– Traditional IRAs (up to $1 million of contributory assets, indexed periodically),
– Roth IRAs (up to $1 million of contributory assets, indexed periodically),
– Simplified employee pension (SEP) plans,
– Savings Incentive Match Plans for Employees (SIMPLE) plans,
– Church plans,
– Governmental plans,
– Multiemployer plans,
– Eligible 457(b) plans of state and local governments and IRC Sec. 501(c)(3) tax-exempt organizations and
– IRC Sec. 501(a) plans of tax-exempt organizations.

• Eligible rollover distributions under IRC Sec. 402(c) retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well.

Nonbankruptcy
• In nonbankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law [see Section 541(c)(2) of the Bankruptcy Code pursuant to Patterson vs. Shumate, 504 U.S. 753 (1992) and Section 206(d)(1) of ERISA].
• The protection of IRA assets (including rollover amounts) from general creditors of the IRA owner in nonbankruptcy situations falls under applicable state law, with many states—but not all—providing some level of exemption. (Link to State Government Websites for more information)
• Keep in mind that any qualified retirement plan or IRA (including traditional, Roth, rollover, SIMPLE or SEP plan IRAs) may be subject to an IRS tax levy.

Conclusion
The amount of creditor protection for retirement assets depends on whether the investor has filed for bankruptcy or not, and the type of retirement savings arrangements involved. For specific situations, individuals should consult legal counsel.

 

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No More Age Restriction for Traditional IRA Contributions

“My client is 80 and still working. She wants to put some money aside for when she might retire; however, she doesn’t have access to a workplace retirement plan. Is an IRA an option?”

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 an advisor in New York is representative of a common question related to making traditional IRA contributions.

Highlights of Discussion

More power to your client! You bet; an IRA is a great option. Of course, the most prudent course of action is to encourage your client to discuss her contribution options with her tax advisor.

Provided your client has the right amount of earned income to support it, she could contribute to a Roth IRA or—because of a key law change—she could contribute to a traditional IRA. She could even do a combination of Roth and traditional IRA contributions as long as she doesn’t exceed the maximum contribution of $7,000 for a person > age 50 between the two accounts. And, because the IRS has granted a special delay to the usual April 15th tax filing deadline,[1] she still could make a 2020 IRA contribution (Roth or traditional) up until May 17, 2021!

Prior to 2020, once a person reached age 70 ½, he or she could not contribute to a traditional IRA any longer. That rule changed for 2020 and later years as a result of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) (see TITLE I, section 107 of the Further Consolidated Appropriations Act of 2020). The SECURE Act removed the age restriction for eligibility to make a traditional IRA contribution.  Roth IRA contributions have never had a maximum age limit, but they are subject to a maximum earnings limit. Consequently, for 2020 and beyond, the only requirement to be able to make a traditional or Roth IRA relates to having modified adjust gross income (MAGI) for the year—enough to make either a traditional or Roth IRA contribution, but not too much in the case of a Roth IRA contribution.

As to the question of deductibility, since your client does not participate in a workplace retirement plan—any traditional IRA contribution she may choose to make would be tax deductible, potentially. Active participation in a retirement plan can affect whether a traditional IRA contribution is tax deductible.  For details, please see a prior case: Active Participation May Affect IRA Deductibility

Conclusion

Recognizing that more people are working passed their 70s and may want to continue to save for retirement, the Administration saw fit to do away with the age limit for making traditional IRA contributions, effective for 2020 and beyond.

[1] Tax Day for individuals extended to May 17

 

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

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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Qualified Charitable Distributions in 2020

“I have a client who consistently has made Qualified Charitable Distributions (QCDs) for the last several years and wants to make another for 2020.  Are they still available even though required minimum distributions (RMDs) are suspended for 2020?”

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 South Dakota is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, if your client is an “eligible IRA owner or beneficiary,” s/he can still make a QCD for 2020 if s/he does so by December 31, 2020. Although the gift will not have the added benefit of counting towards an RMD for the year (since none are due pursuant to the CARES Act), s/he’ll still be able to exclude the QCD from taxable income and have the satisfaction of supporting a good cause. Because the QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums because of the reduced income. Note that for those who make both QCDs and deductible IRA contributions in the same year, new rules as a result of the SECURE Act may limit the portion of a QCD that is excluded from income.
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006.  After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that s/he would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • Changes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act made the decisions related to charitable giving more complicated in 2020. In addition to the above information on QCDs, the CARES Act created a new above-the-line deduction of $300 for charitable contributions, and allows for cash gifts to most public charities of up to 100 percent of adjusted gross income in 2020.  Because of the added complexity, seeking the advice of a tax professional regarding charitable giving would be the best course of action. IRS Publication 526, Charitable Contributions, provides good basic information on the topic.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).

 Conclusion

Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.  Law changes have enhanced other giving options, making professional tax advice essential when making a gifting decision.

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