In July of 2014 the IRS issued final regulations regarding the allowance of qualified longevity annuity contracts in employer sponsored plans such as 401ks, 403bs and 457b plans as well as IRAs. What it Means and What it Means to You QLAC stands for qualified longevity annuity contract. This means that a person is allowed to take up to 25% of their overall account balance but not more than $125,000 in their retirement plan and use that money as premium to fund a longevity annuity contract. Additionally, the annuitant must start the annuity by no later than the first day of the month following the attainment of age 85. They can however, start earlier. In a 401k, 403b or 457b plan a QLAC can be purchased up to the maximum of $125,000 across all accounts (IRAs included), but not more than 25% of the account balance per plan. IRAs Purchasing […]
With the passage of the Taxpayer Tax Increase Prevention Act of 2014, the qualified charitable distribution (QCD) from your IRA is available through the end of the year under normal rules. This means that you can, if you’re age 70½ or older, make direct distributions from your IRA to a qualified charity or charities, not counting the distribution as income and not itemizing the charitable contribution.
Those of us who are parents know this conflict very well – should we put aside money for retirement, or for college saving? It may come as a surprise, but a general rule of thumb with regard to this conflict is to put money aside for retirement first, and college second. The reason behind this is that there are many ways to pay for college, such as grants, scholarships, work-study programs, student loans, parent loans, etc.. With this plethora of choices, it becomes clear that your student’s college funding needs can be met from quite a few angles, none of which should have a dramatic impact on your overall net worth (or your student’s). On the other hand, no one will give you a scholarship to retire. It is solely up to you and your savings (coupled with Social Security and any available pensions).
Listen to this post: Most of you have one or more types of defined contribution retirement plans, such as a 401(k), 403(b), 457, IRA, SEP-IRA, or any of a number of other plans. Each type of plan has certain characteristics that are a little different from other plans, but most of them have the common characteristic of deductibility from current income and deferred taxation on growth. 1. Each dollar you defer is worth more than a dollar. It’s true. As you defer money into your retirement account, each dollar that you defer could be worth as much as $1.66. How, you might ask? Since you are not taxed on the dollar that has been deferred into the retirement account, your “take home” pay only reduces by the amount that is left over after taxation. For example, if you’re in the 25% bracket, generally your income will only reduce by 75¢ […]
Sometimes when we need more money for a specific goal in the future such as retirement, college, a down payment on a home or an emergency fund we may feel that before these things can happen we need to make more money. We may feel that once our incomes are up to a certain level that we’ll be able to afford to save for those goals. It may not be necessary to earn more in order to achieve the above goals. For many folks the solution is simply to prioritize between wants and needs. In other words, learning to distinguish between the wants and the needs in your life and then reallocating your money to fund retirement or college goals without having to ask for a raise or get a second job.
As you plan and save for your retirement, it’s nice to have multiple types of taxation for your income sources. You may have a pension, Social Security, and a traditional IRA, all of which are taxed to some degree or another. Adding to this list you might have a Roth IRA which generally will provide you with tax-free income in retirement. The problem with the Roth IRA is that you have some strict limits on the amounts that you can contribute, and typical Roth Conversion strategies are costly and complicated. With the recent pronouncement from the IRS in Notice 2014-54, there is a brand new, sanctioned method, to fund your Roth IRA.
This year marks the 40th anniversary of the Individual Retirement Arrangement (IRA). In 1974 via the ERISA law, Congress made this new type of retirement plan available for employees whose employers who could not provide them with the traditional type of retirement plan. In 1981, the plans were made generally available to all taxpayers. The Tax Reform Act of 1986 limited the deductibility of IRAs by income. 1997 saw the launch of the Roth IRA, as a part of the Taxpayer Relief Act of 1997. This type of IRA came with no deductibility, but earnings (and contributions) would be tax free upon distribution, following the rules associated with the accounts. With the exception of changes to limits of contributions, income limits, and catch-up provisions, little has changed for these accounts since 1997, with the exception of the introduction of the Roth-IRA-like myRA account that was established in 2014 for the […]
The IRS recently published the new contribution limits for various retirement plans for 2015. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw a few increases for some contribution amounts, and the income limits increased for most types of accounts after virtually no changes to the contribution amounts in 2014.
Recently the IRS issued a Notice, 2014-54, which details some information regarding the allocation of pre-tax funds from a qualified plan (such as a 401(k) plan) into a Roth IRA. This is a clarification of a question that has been on the minds of folks in the financial services industry for some time, and it’s a good result. Now the question becomes: does this help to clarify NUA basis allocation strategies? If you’d like additional detail on Notice 2014-54, you can find the actual text of the Notice by clicking this link. What I find interesting about this Notice is that this is the first time that the IRS has used this interpretation of the rules referenced specifically in IRC Section 402(c)(2), which is the code section I’ve referenced before regarding allocation of basis for Net Unrealized Appreciation (NUA) treatment for employer stock. (See more information in this most recent […]
As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD. An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag:
When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution. For all other years you must take your RMD by December 31 of that year. For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year. However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden. There may be many circumstances that could make this delay work to your advantage – maybe you’re still working […]
What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA? In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years? The Inheritance So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary. Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death. As of now, for example’s sake, let’s say we’re in the […]
Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA. This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach. Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options. Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for […]
This past week the US House of Representatives passed a bill (HR 4719, known as the America Gives More Act) which would re-instate the Qualified Charitable Distribution from IRAs and make the provision permanent. This provision expired at the end of 2013, as it has multiple times in the past, only to be re-instated temporarily time and again. A Qualified Charitable Distribution (QCD) is when a person who is at least age 70½ years of age and subject to Required Minimum Distributions from an IRA is allowed to make a distribution from the IRA and direct the distribution to a qualified charitable organization without having to recognize the income for taxable purposes. This has been a popular option for many taxpayers, especially since the QCD can also be recognized as the Required Minimum Distribution for the year from the IRA.
Divorcing couples often face the need to split up some retirement account assets. This can be done from a retirement plan such as a 401(k) or 403(b), or from an IRA. Depending on which type of account you’re splitting, the rules are very similar but are referred to by different names. For a qualified retirement plan (401(k) or 403(b) plan), the operative term is Qualified Domestic Relations Order or QDRO (cue-DRO). For an IRA, the action is known as a transfer incident to a divorce. We discussed the QDRO in several other articles, so we’ll focus on the transfer incident to a divorce in this article.
In a previous article we discussed the changes to the IRA One-Rollover-Per-Year rule. There are certain types of rollovers that are not included in that restriction, detailed below. As mentioned in the earlier article, trustee-to-trustee transfers are not considered “rollovers” by the IRS regarding this rule. So you are allowed to make as many trustee-to-trustee transfers in a year as you like – no restrictions on these kinds of transfers at all. This includes trustee-to-trustee transfers from or to IRAs, 401(k)s, 403(b)s, or any eligible plan. In addition, a rollover from an IRA into a 401(k) or other Qualified Retirement Plan (QRP) is not impacted by this rule. This means that you can roll funds out of your IRA and into your employer’s 401(k) plan with no restriction – regardless of whether or not you have already made an IRA-to-IRA rollover in the previous 12 months. Similarly, a rollover from […]
When converting from a 401(k), traditional IRA, 403(b), SIMPLE IRA, SEP or 457(b) to a Roth IRA there are some important tax considerations to keep in mind. First, converting from a tax deferred plan to a tax free plan it’s not always the best idea. Generally, it’s going to make sense to convert if the tax payer believes that he or she will be in a higher income tax bracket in retirement. For example, John, age 28 has a 401(k) and recently left his employer. He’s currently in the 15% bracket but expects to be in the 28% bracket or higher in retirement. It may make sense for John to convert his 401(k) to his Roth IRA. This makes sense for John because when he converts from a pre-tax, employer sponsored plan like the 401(k) it’s money that has not yet been taxed. If he converts while in the 15% […]
Procrastination is a silent and slow killer. Everyone, including yours truly, is guilty of putting things off, waiting until the last minute and then scurrying around frantically to get done what we could have easily gotten finished weeks or months ago if we would have either planned ahead or simply started. Let me give you an example. Last year my wife and I were debating whether or not to have a tree removed from our back yard. The culprit is the much loathed sweet gum tree that is common in this area of the country. Readers familiar with this pariah of the deciduous family of trees recognize it with annoying “gumballs” that are far from being smooth but rather are the sharp and pointy fruits that fall relentlessly from the tree mainly in the fall and work wonders on mower blades and bare feet. Needless to say they are a […]
As a follow-up to the recent post on this blog The One-Rollover-Per-Year Rule: Revised, the IRS has recently released some additional guidance on the subject, via Announcement 2014-15. As previously mentioned, the IRS has determined to begin using the one-rollover-per-year rule applied to ALL IRAs that the taxpayer owns, rather than only the affected IRAs that have been involved in a rollover. According to the Announcement, the IRS fully acknowledges that the previous understanding of the rule was that it applied on an IRA-by-IRA basis. In fact, there was a Proposed Regulation § 1.408-4(b)(4)(ii) on the books that was to further define the rule as applied only to the involved IRAs. Ever since the Tax Court decided otherwise in the case Bobrow v. Commissioner (TC Memo 2014-21), the rule has been changed. According to the recent announcement though, this will not take affect across the board until January 1, 2015. […]