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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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Active Plan Participation May Affect IRA Deductibility

“Active participation in an employer’s retirement plan can affect whether an IRA contribution made by the participant is deductible on the tax return. What does ‘active participation’ mean?”

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 plans.  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 Minnesota is representative of a common inquiry involving a taxpayer’s ability to make a deductible IRA contribution.

Highlights of Discussion

This is an important tax question that can only be answered definitively by a person’s own tax advisor.  Generally speaking, for purposes of the IRA deduction rules, an individual is an “active participant” for a taxable year if either the individual or the individual’s spouse actively participates during any part of the year in a(n)[1]

  • Qualified plan described in Internal Revenue Code Section [IRC §401(a)], such as a defined benefit, profit sharing, 401(k) or stock bonus plan;
  • Qualified annuity plan described in IRC §403(a);
  • Simplified employee pension (SEP) plan under IRC §408(k);
  • Savings incentive match plan for employees (SIMPLE) IRA under IRC §408(p);
  • Governmental plan established for its employees by the federal, state or local government, or by an agency or instrumentality thereof (other than a plan described in IRC §457);
  • IRC §403(b) plan, either annuity or custodial account; or
  • Trust created before June 25, 1959, as described in IRC §501(c)(18).

When an individual is considered active depends on the type of employer-sponsored plan.

Profit Sharing or Stock Bonus Plan:   During the participant’s taxable year, if he or she receives a contribution or forfeiture allocation, he or she is an active participant for the taxable year.

Voluntary or Mandatory Employee Contributions:  During the participant’s taxable year, if he or she makes voluntary or mandatory employee contributions to a plan, he or she is an active participant for the taxable year.

Defined Benefit Plan: For the plan year ending with or within the individual’s taxable year, if an individual is not excluded under the eligibility provisions of the plan, he or she is an active participant for that taxable year.

Money Purchase Pension Plan: For the plan year ending with or within the individual’s taxable year, if the plan must allocate an employer contribution to an individual’s account he or she is an active participant for the taxable year.

Refer to IRS Notice 87-16 for specific examples of active participation.

As a quick check, Box 13 on an individual’s IRS Form W-2 should contain a check in the “Retirement plan” box if the person is an active participant for the taxable year.

If an individual is an active participant, then the following applies for IRA contribution deductibility.  The maximum traditional IRA contribution for 2020 and 2021 is $6,000 for those under age 50 and $7,000 for those age 50 0r greater.

IF your filing
status is …
AND your modified adjusted gross income (modified AGI)
is …
THEN you can take …
single or
head of household
$65,000 or less a full deduction.
more than $65,000
but less than $75,000*
a partial deduction.
$75,000 or more no deduction.
married filing jointly or
qualifying widow(er)
$104,000 or less a full deduction.
more than $104,000
but less than $124,000**
a partial deduction.
$124,000 or more no deduction.
married filing separately2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
Not covered by a plan, but married filing jointly with a spouse who is covered by a plan  $196,000 or less a full deduction.
  more than $196,000
but less than $206,000***
a partial deduction.
Source:  IRS 2020 IRA Deduction Limits

 

$206,000 or more no deduction.
*$66,000-$76,000 for 2021; **$105,000-$125,000 for 2021; and ***$198,000-$208,000 for 2021

 

Conclusion

Participating in certain employer-sponsored retirement plans can affect an individual’s ability to deduct a traditional IRA contribution on an individual’s tax return for the year. The IRS Form W-2 should indicate active participation in an employer-sponsored retirement plan. When in doubt, taxpayers should check with their employers.

 

 

[1] See www.legalbitstream.com for IRS Notice 87-16

 

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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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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 August 20, 2019, 10 states have succeeded in enacting laws creating retirement savings programs for private-sector workers. [1]

State Plan Name Type of Plan
1.     California California Secure Choice Retirement Savings Program Automatic Roth IRA
2.     Connecticut Connecticut Retirement Security Program Automatic Traditional or Roth IRA
3.     Illinois Illinois Secure Choice Savings Program Automatic Roth IRA
4.     Maryland Maryland Small Business Retirement Savings Program Automatic Traditional IRA
5.     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.
6.     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.
7.     New York New York State Secure Choice Savings Program Payroll Deduction Roth IRA
8.     Oregon OregonSaves

 

Automatic Roth IRA
9.     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
10.  Washington Washington’s Small Business Retirement Marketplace

 

A marketplace where qualified financial services firms offer low-cost retirement savings plans to businesses and individuals

Another 24 states have introduced legislation on this topic that is still under consideration: Arizona, Colorado, Georgia, Iowa, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, New Hampshire, Nebraska, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin.

Conclusion

Considering that federal legislation to address the retirement security of American works has progressed at a snail’s pace, some state legislatures have taken on the task and enacted laws that create state-sponsored retirement savings plans for private-sector workers. Many other states are considering similar action.

[1] AARP Public Policy Institute, State Retirement Savings Resource Center, August 2019

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De-villainizing Backdoor Roth IRAs

“Backdoor Roth IRAs sound bad. Are they?”  

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 IRA conversions.

Highlights of the Discussion

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.

The ability to make a 2019 Roth IRA contribution is phased out and eliminated for single tax filers with income between $122,000-$137,000; and for joint tax filers with income between $193,000-$203,000. 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—through a traditional IRA.

For traditional IRA contributions, there are modified adjusted gross income (MAGI) thresholds that apply above which individuals are prevented from making deductible contributions.[1] However, anyone under the age of 70½ with earned income can make a nondeductible contribution to a traditional IRA, regardless of income level.  Anyone with a traditional IRA can convert it to a Roth IRA regardless of income level. The traditional-IRA-to-Roth-IRA conversion is another route to having a Roth IRA—what has become known as the backdoor Roth.

IRA technicians through the years have raised the specter of the Step Transaction Doctrine to cast a shadow over the efficacy of the backdoor Roth IRA. The Step Transaction Doctrine is a broad application tax law policy in which the IRS may view a series of separate but related transactions as a single transaction and apply any tax liability based on that transaction rather than the individual transactions in the series.

A traditional-IRA-to-Roth-IRA conversion is a taxable event to the extent a person converts pre-tax dollars. There are ways to maximize the tax efficiency of the transaction, for example, by rolling over IRA pre-tax dollars first to a qualified retirement plan. Those strategies are beyond the scope of this writing, but the consultants at RLC’s Resource Desk would be happy to have those discussions.

Informal guidance from the IRS and Congress from a year ago seems to have put to rest the concerns about backdoor Roth IRAs and the Step Transaction Doctrine. First, Congress made reference to the legitimacy of the traditional-IRA-to-Roth-IRA conversion in its conference report for the Tax Cut and Jobs Act (see page 289).

Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.

Second, in a July 10, 2018, Tax Talk Today, Donald Kieffer Jr., a tax law specialist in employee plans rulings and agreements with the IRS Tax-Exempt and Government Entities Division, said the backdoor Roth is allowed under the law. Mr. Kieffer stated: “I think the IRS’s only caution would be whenever we see words like ‘backdoor’ or ‘workaround’ or other step transactions that are putatively enabling a way to get around limits – especially statutory contribution limits – you generally find the IRS is not happy and prepared to challenge those. But in this one that we’re talking about, it’s allowed under the law.”

Conclusion

According to IRS and Congressional guidance, “backdoor” is no longer a cue for a potentially illicit tax activity when linked to Roth IRA. Therefore, it’s time to de-villainize the transaction.

[1] If filing a joint return and covered by a workplace retirement plan $103,000,-$123,000; Single or head of household $64,000-$74,000; and Joint return with spouse not covered by a workplace plan $193,000-$203,000

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