Tag Archive for: Roth IRA

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CalSaver’s Plan and Federal Plan Startup Tax Credit

 “A number of my business clients have been required to adopt the Calsaver’s plan for their employees. Now I see the SECURE Act 2.0 of 2022 sweetened the federal tax credit for plan startup costs for businesses with 50 or fewer employees. If a business has adopted the CalSaver’s plan is the plan startup tax credit still available to them?”

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 dealt with a question on CalSaver’s plan.

Highlights of Discussion
The good news is, “yes,” small business owners that adopted the CalSaver’s plan will still qualify for the federal plan startup tax credit if they want to upgrade from the CalSaver’s plan to a simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) or qualified plan (e.g., 401(k) plan) and they otherwise qualify for the tax credit (i.e., had 100 or fewer employees who received at least $5,000 in compensation for the preceding year; and had at least one plan participant who was a nonhighly compensated employee).

The federal plan startup credit under IRC Sec. 45E is not available if, during the three-taxable year period immediately preceding the first taxable year for which the credit would otherwise be allowed, the employer or any member of any controlled group including the employer (or any predecessor of either), established or maintained a “qualified employer plan” with respect to which contributions were made, or benefits accrued, for substantially the same employees as are in the new qualified employer plan. A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the plan startup credit if the employer is otherwise eligible.

Section 102 of the SECURE Act 2.0 of 2022 (see page 819) increases the plan startup credit from 50 percent to 100 percent of eligible plan startup cost up to $5,000 for the first three years for employers with up to 50 employees. Prior rules still apply for those with 51-100 employees. What’s more, there is an additional credit available for defined contribution plans that is a percentage of employer contributions made for five years on behalf of employees, up to a per-employee cap of $1,000. The contribution credit is phased out for employers with between 51 and 100 employees.

Conclusion
A CalSaver’s plan is a payroll deduction Roth IRA—completely employee funded. It is not considered a qualified retirement plan that would preclude a small employer from being eligible to claim the federal plan startup credit if the employer is otherwise eligible and establishes a SEP, SIMPLE or qualified plan.

 

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Roth IRA or In-Plan Conversion Deadline for 2022 Taxation

“My client wants to complete a Roth conversion. Is there a conversion deadline?”

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 Florida is representative of a common inquiry related to Roth conversion taxation.

Highlights of the Discussion

  • As with any tax-related question, I always start by suggesting individuals talk with their tax advisors regarding their personal financial situations.
  • According to IRS rules, the deadline for completing a Roth IRA or Roth in-plan conversion relates to the year in which your client wants to pay taxes on the conversion. A Roth conversion is taxable in the year it is completed. For example, in order to include the taxable portion of a Roth conversion in income for 2022, the conversion must be completed by December 31, 2022. There is no carryback period for a conversion as there is for making a regular Roth IRA contribution.
  • Note that the IRS just announced the new tax brackets for 2023, and while the same seven tax rates in effect for the 2022 tax year (i.e., 10%, 12%, 22%, 24%, 32%, 35% and 37%) still apply for 2023, there were quite sizeable changes in the width of the income ranges for the various brackets. Therefore, it may be advantageous for your client to compare his 2022 tax bracket to his anticipated 2023 tax bracket when considering the timing for a Roth conversion. Of course, there are other factors that may affect his decision on timing, including how the income from the conversion will affect his applicable tax bracket.

Example:  Soleste and her husband are part of the married-filing-jointly tax-filing category.  For 2022, they anticipate their taxable income will be $180,000. That would put them in the 24% tax bracket. Looking ahead to 2023, they anticipate their taxable income will be about the same (i.e., $180,000). Because of the tax bracket changes for 2023, they will fall into the 22% tax bracket in 2023. Of course, they will have to consider whether the income generated from the conversion will affect which tax bracket applies.

Year/Filing Status Anticipated Income Income Range Tax Rate
2022 Married Filing Jointly $180,000 $178,151 to $340,100 24%
2023 Married Filing Jointly $180,000 $  89,451 to $190,750 22%

Source:  Revenue Procedure 2022-38

Conclusion

The deadline for completing a Roth IRA or Roth in-plan conversion depends on the year in which an individual wants to include the taxable portion of the Roth conversion in income. A Roth conversion is taxable in the year it is completed. To be taxable for a particular year, the conversion must be completed by December 31st.

 

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Roth IRAs v. Designated Roth 401(k)s

“What are the differences between Roth IRAs and designated Roth 401(k) accounts?”

Highlights of discussion

While there are many differences, the following chart summarizes some of the key dissimilarities.

Feature Roth IRA Designated Roth 401(k) account
Investment options Generally, unlimited, except for life insurance and certain collectibles As specified by the plan
Eligibility for contribution  Must have earned income under $144,000 if a single tax filer or under $214,000 if married filing a joint tax return ·   Access to a 401(k), 403(b) or governmental 457(b) plan with a designated Roth contribution option and

·   The individual must meet eligibility requirements as specified by the plan

Contribution limit (2022) $6,000 ($7,000 if age 50 or older) $20,500 ($27,000 if age 50 or older)
Conversions Anyone with eligible IRA or employer-plan assets may convert them to a Roth IRA Plan permitting, anyone with eligible plan assets may convert them within the plan to a designated Roth account
Recharacterize contribution Yes, within prescribed period No
Required minimum distributions Not during owner’s lifetime Yes
Tax- and penalty-free qualified distributions, regardless of type of money Taken

·      After owning the Roth IRA for five years and

·      Age 59 ½, death, disability, or for first home purchase

Must have a distributiontriggering event under plan terms, plus

·   Five years after owning the designated Roth account and

·   Age 59 ½, death, or disability

Tax and/or penalty on nonqualified distributions based on type of money According to IRS distribution ordering rules:

1.     Contributions: Always tax- and penalty-free

2.     Taxable Conversions: On a first-in, first-out basis by year; always tax-free; penalty if taken within five years of conversion

3.     Nontaxable conversions:  On a first-in, first-out basis by year; always tax- and penalty-free

4.     Earnings: Taxed as ordinary income, subject to penalty unless exception applies

Withdrawals represent a pro-rata return of contributions and earnings in the account; earnings are taxable and subject to penalty unless an exception applies. See IRS Notice 2010-84 for rules applicable to the return of designated Roth 401(k) converted amounts
Timing of distributions At any time, subject to tax and/or penalty depending on type of assets distributed Following plan-defined, distribution triggering events
Loans No Yes, if plan permits
Five-year holding period for qualified distributions Begins January 1 of the year a contribution or conversion is made to any Roth IRA of the owner ·         Separate for each 401(k) plan in which an individual participates

·         Begins January 1 of the year a contribution or in-plan conversion is made to the account

 Beneficiary Anyone, but spousal consent required in community property states Anyone, but spousal consent required

 

Conclusion

While both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other or both may be right for a particular investor depends on the individual’s circumstances and goals and should be determined based on a thorough conversation between the investor and his or her tax advisor.

 

 

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Designated Roth 401(k) Contributions and IRS Form 8606

My client made designated Roth 401(k) contributions in 2021. Because these contributions are made on an after-tax or nondeductible basis, does that mean he must file IRS Form 8606 to report them?”

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 Tennessee is representative of a common question related to designated Roth 401(k) contributions.

Highlights of Discussion

  • When dealing with tax-related questions, always seek the guidance of a tax professional. What follows is general information based on IRS tax forms.
  • No, designated Roth contributions made to a 401(k) plan are not reported on IRS Form 8606, Nondeductible IRAs (see the instructions for Form 8606). The 401(k) [or 403(b) or governmental 457(b)] plan administrator reports such contributions on a worker’s IRS Form W-2, Wage and Tax Statement in box 12. Because designated Roth 401(k) contributions are subject to federal income tax withholding and Social Security and Medicare taxes (and railroad retirement taxes, if applicable), they also must be included in boxes 1, 3, and 5 (or box 14 if railroad retirement taxes apply) on Form W-2.
  • Please note that where designated Roth 401(k) contributions might show up on Form 8606 is on Line 22, which is used to report the basis in a Roth IRA. Any designated Roth 401(k) amounts an individual rolls into his Roth IRA during the year would be included as basis in the Roth IRA and included in the figure reported on Line 22.

Conclusion

Designated Roth contributions made to a 401(k) plan are not reported on IRS Form 8606, Nondeductible IRAs. However, a taxpayer will need to include designated Roth 401(k) amounts rolled into a Roth IRA in the value of the Roth IRA’s basis.

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Designated Roth Account Rollover and Five-Year Rule

“My client participates in a 401(k) plan, has a Designated Roth account and wants to roll over the Designated Roth account to a Roth IRA. Can my client count the time in the 401(k) plan towards the five-year waiting period for the Roth IRA needed for taking qualified distributions?”

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 Pennsylvania is representative of a common inquiry regarding Designated Roth contributions in a 401(k) plan.

Highlights of Discussion
The short answer is, surprisingly, “No.” If your client rolls over his or her 401(k) plan Designated Roth account assets to a Roth IRA, the time spent in the Designated Roth account will not carry over to the Roth IRA (IRS Treasury Regulation § 1.408A–10, Q&A 4).

That means, if your client established his or her first Roth IRA with the rollover of Designated Roth account assets, the five-year period for determining qualified distributions from the Roth IRA would begin that year. In essence, the five-year period for determining qualified distributions in the 401(k) plan is determined separately from the five-year period for determining qualified distributions in the Roth IRA.

It’s another one of those “earlier of” scenarios for the Roth IRA and the five-year period §1.408A–6, Q&A 2. The five-year period for the Roth IRA begins with the earlier of the taxable year in which

• The first Roth IRA contribution (or conversion) is made to any Roth IRA owned by the individual, or
• A rollover contribution of a Designated Roth account is made to a Roth IRA.

Conclusion
The five-year period for determining qualified distributions from a 401(k) plan Designated Roth account is determined separately from the five-year period for determining qualified distributions in a Roth IRA. For that reason, it may be advantageous for investors to make a Roth IRA contribution sooner rather than later in order to put the five-year clock in motion in the Roth IRA.

 

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2021 Qualified Charitable Distributions from IRAs

“The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the age for taking requirement minimum distributions (RMDs) to age 72.  Did it also change the age for making Qualified Charitable Distributions (QCDs)?”

 

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

Highlights of the Discussion

  • No, the SECURE Act did not change the eligibility age for making a QCD; it remains at 70½. So, any “eligible IRA owner or beneficiary” (defined below) can make a QCD up to $100,000 for 2021 by December 31, 2021.  The contributor must keep records to prove the amount of the QCD  (see Substantiation Requirements in IRS Publication 526, Charitable Contributions).
  • Those who make QCDs before reaching age 72 will not have the added benefit of counting them towards their RMDs, but the QCDs still will be excludable from taxable income and go towards supporting good causes. Because a QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums. Note that for those who make both QCDs and deductible IRA contributions[1] in the same year may need to 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 attained age 70½ 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 a QCD contributor would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • 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).
  • There are other charitable giving options aside from QCDs. For example, the Consolidated Appropriations Act extended two temporary tax changes through the end of 2021 to encourage charitable giving by individuals (see Covid Tax Tip 2021-143). They include 1) a limited deduction (up to $600 for married couples) for charitable cash contributions for individuals who do not itemize deductions; and 2) a deduction of up to 100 percent of the taxpayer’s adjusted gross income for certain charitable cash contributions (if properly elected on their 2021 Form 1040 or Form 1040-SR) by those who itemize their deductions.
  • As one can see, the options for charitable giving are many and can be confusing, making consultation with a tax professional a recommended course of action.

Conclusion

Eligible traditional and Roth 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 and extensions have enhanced other giving options, making professional tax advice essential when making a gifting decision.

 

[1] The SECURE Act also eliminated the maximum age limit for making traditional IRA contributions.

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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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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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State-sponsored retirement plans for private-sector workers

“Which states, if any, have enacted or proposed legislation that would enable them to offer retirement savings programs to private-sector workers?”

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 states and retirement plans.

Highlights of the Discussion

As of October 6, 2020, 12 states have succeeded in enacting laws creating retirement savings programs for private-sector workers. [1] One city—Seattle, WA—has also enacted an auto IRA program.[2] The following represents a high-level overview of the various plans.

State/City Plan Name Type of Plan
1.     California California Secure Choice Retirement Savings Program Automatic Roth IRA
2.     Colorado Colorado Secure Savings Program Automatic Traditional IRA
3.     Connecticut Connecticut Retirement Security Program Automatic Traditional or Roth IRA
4.     Illinois Illinois Secure Choice Savings Program Automatic Roth IRA
5.     Maryland Maryland Small Business Retirement Savings Program Automatic Traditional IRA
6.     Massachusetts Massachusetts Defined Contribution CORE Plan

 

A multiple employer plan that is a pre-tax and post-tax 401(k) savings plan developed for employees of eligible small nonprofit organizations.
7.     New Jersey New Jersey Small Business Retirement Marketplace

 

A marketplace for diverse retirement plans, including, at least, life insurance plans, Savings Incentive Match Plans for Employees (SIMPLE) IRAs and payroll-deduction IRAs.
8.     New Mexico The New Mexico Work and Save Act

 

Voluntary Payroll Deduction Roth IRA
9.     New York New York State Secure Choice Savings Program Voluntary Payroll Deduction Roth IRA
10.  Oregon OregonSaves

 

Automatic Roth IRA
11.  Vermont Vermont Green Mountain Secure Retirement Plan

 

A multiple employer plan that is a tax-deferred, pre-tax 401(k) savings plan with optional future employer contributions
12.  Washington Washington’s Small Business Retirement Marketplace

 

A marketplace where qualified financial services firms offer low-cost retirement savings plans to businesses and individuals
13.  Seattle, WA Seattle Retirement Savings Plan

 

Automatic Traditional or Roth IRA

Additionally, another 21 states have introduced legislation on this topic that is still under consideration. Those states include: Arizona, Georgia, Iowa, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, New Hampshire, Nebraska,  North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin.

For additional information, please see State-Administered IRA Programs: Overview and Considerations for Congress from the Congressional Research Service.

Conclusion

Concerned with the retirement security of their workers, some state legislatures have enacted laws that create state-sponsored retirement savings plans for private-sector workers. Many other states are considering similar action. The industry can expect more activity in this area in the coming months.

 

[1] AARP Public Policy Institute, State Retirement Savings Resource Center, October 2020

[2] Chapter 14.36, Seattle Retirement Savings Program

 

 

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