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Electronic Filing of Amended Tax Returns – Coming Soon!

Big News! The IRS just announced that amended tax returns (Form 1040X only, for now) can soon be filed electronically!

For just about anyone in the world except for tax preparers, this seems like a yawner. After all, the IRS has been requiring electronic filing of just about every other tax return for a few years now. Up until now though, the 1040X, personal amended tax return, has been a paper-only filing.

The result is that when a return needs to be amended, we preparers have had to step back in time, print and assemble a return, attach the required documentation, get signatures, and mail the return via snail mail. And then the taxpayer has to wait, wait, wait until the paper filing has been received and accepted (using the “Where’s My Amended Return” tool on IRS’s website).

This development will definitely speed up the process and eliminate a lot of paper-handling, especially in simple matters of correcting errant information on the return. Definitely looking forward to using this!

The IRS just recently announced this development in a Newswire (IR-2020-107). The contents of the original newswire are reproduced below.

IRS announces Form 1040-X electronic filing options coming this summer; major milestone reached for electronic returns

WASHINGTON- The Internal Revenue Service  announced today that later this summer taxpayers will for the first time be able to file their Form 1040-X, Amended U.S Individual Income Tax Return, electronically using available tax software products.

Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years. It’s also been an ongoing request from the nation’s tax professional community and has been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and Electronic Tax Administration Advisory Committee (ETAAC).

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form. 

“This new process is a major milestone for the IRS, and it follows hard work by people across the agency,” said IRS Commissioner Chuck Rettig. “E-filing has been one of the great success stories of the IRS, and more than 90 percent of taxpayers use it routinely. But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process. Our teams have worked diligently to overcome the unique challenges related to the 1040-X, and we look forward to offering this new service this summer.”

About 3 million Forms 1040-X are filed by taxpayers each year.

The new electronic filing option will provide the IRS with more complete and accurate data in an easily readable format to enable customer service representatives to answer taxpayers’ questions. Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their electronically-filed 1040-X.

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.

“Adding amended returns to the electronic family also complements our partnership with the tax software industry, which continues to work with us to provide better ways to help taxpayers,” said Ken Corbin, Commissioner of the IRS Wage and Investment division.  

Babies from 1960: 2020 is a year you’ll never forget


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The year 2020 is, for many obvious reasons, going to be a year none of us will forget anytime soon. But for those who were born in 1960, even if the coronavirus came nowhere near you personally, 2020 will have a lasting impact on you, regardless.

If you were born in MCMLX (1960), the year 2020 is when you’ll reach age 60. For anyone, this is a momentous occasion. Reaching six decades of age is a wonderful event, opening the passageway to retirement, grandparenting (and great-grandparenting) among many other favored activities. For our purposes in this article, you should know that age 60 is also a very important year for your Social Security benefits. Age 60 is when your wage index is set, which determines many things about your Social Security benefits.

The year 2020, with the severe economic downturn, is going to have a long-lasting impact on you newly-minted sexagenarians, specifically on your Social Security benefits. This is because of the way Social Security benefits are calculated – and the economic figures that are most likely to be written in stone a bit later this year.

I’m not going to go into complete detail on how Social Security benefits are calculated in this post – my primary message here is to help you understand why 2020’s economic results will have such a lasting impact. If you’d like a complete description of how Social Security benefits are calculated, see this article about the Primary Insurance Amount or the AIME, as starting points in your education.

The problem is in the calculation

When Social Security determines your benefit amount, a very complicated set of calculations occur. One portion of that calculation is an averaging of your lifetime (the top 35 years) of earnings. The calculation isn’t a simple average, however – it’s an indexed average, and the indexing year is the year you reach age 60. 

Let that sink in for a bit… I’m guessing that didn’t help much, did it? How about if I work through a simple example to illustrate the problem?

Rather than working with 35 years’ worth of earnings (because that gets unwieldy in a hurry), let’s work with an example of only 5 earnings periods. And I’ll simplify the numbers so it’s a bit easier to grasp. Look at the table below for starters:

Year Income
1 $1,000
2 $1,100
3 $1,250
4 $1,400
5 $1,500

Simple enough. Year 5 is representing the year 2020 for 1960 children, your indexing year. When Social Security determines your benefits, they look at your overall earnings history – and for our example the above brief table will suffice.

Since Social Security is not simply based on what you’ve earned, but rather what you’ve earned relative to the rest of all earners in your age group, we need another column in the table. This column is the Average Wage Index for all people earning in any given year. 

Briefly, the Average Wage Index is determined by totaling all wages earned in the US in a given year, and then dividing that number by the number of people who earned those wages (all who received a W2). Self-employed folks are counted as well, just in a slightly different manner based on their tax returns.

So for the purpose of our example, let’s fill in an Average Wage Index (AWI) for the record:

Year Income AWI
1 $1,000 $1,050
2 $1,100 $1,135
3 $1,250 $1,157
4 $1,400 $1,282
5 $1,500 $1,353

These AWI numbers represent that nationwide average for the year in question – don’t get hung up on the numbers themselves, I just randomly generated some numbers to fill in the slots. The point is that these are the averages for those years.

The next step in the process is to index your earnings against the averages. To do this, we set year 5 as the “index year”, and we make all of the other averages simply a comparison to that index year. To fill in the first year’s index, we simply divide our index year by the AWI figure for that year – $1,353 / $1,050 = 1.28857. And so we fill in the rest of the table:

Year Income AWI Index
1 $1,000 $1,050 1.28857
2 $1,100 $1,135 1.19207
3 $1,250 $1,157 1.16940
4 $1,400 $1,282 1.05538
5 $1,500 $1,353 1.00000

Hopefully the way the index column is determined makes sense. Again, this simply shows the AWI figure in terms of each year’s relative value compared to the AWI figure for the index year, Year 5. So Year 5 is of course, 1.00000, since it is equal to itself.

Now that we’ve determined the Indexes, we apply each year’s index to your actual income for that year. We do this by multiplying the Index column by the Income column, to come up with an Indexed Income column:

Year Income AWI Index Indexed Income
1 $1,000 $1,050 1.28857 $1,289
2 $1,100 $1,135 1.19207 $1,311
3 $1,250 $1,157 1.16940 $1,462
4 $1,400 $1,282 1.05538 $1,478
5 $1,500 $1,353 1.00000 $1,500

Taking a look at the figures in the Indexed Income column, you can see that, for example, the $1,100 that you earned in Year 2 is equivalent to $1,311 when compared to the AWI for the periods, with Year 5 as the Index year.

The last bit is to average these numbers – so we add up the five years’ worth of Indexed Income, and divide by 5, the number of periods in our example. Adding up we come up with $7,040, and dividing by 5 we have $1,408 as our result. This is our Average Indexed Earnings. (Keep in mind my example is much more simplified than Social Security’s actual calculation, which works with Monthly earnings, rather than yearly, and the total years in question are 35 rather than 5. The concept is the same, however.)

Alright – so now we’ve gotten this far, let’s get to the point of the problem: since the Indexing year is kinda the foundation of the whole process, what happens when that figure is adjusted? And by adjusted, in the context of this problem we’re covering, I mean adjusted downward – perhaps significantly.

For the year 2020, it is anticipated that the AWI figure may be less than was anticipated, and most likely less than it was in 2019. To see the affect this will have on our example, I’ll adjust the AWI figure downward by the projected 6.7% less than the prior year:

Year Income AWI Index Indexed Income
1 $1,000 $1,050 1.13905 $1,139
2 $1,100 $1,135 1.05374 $1,159
3 $1,250 $1,157 1.03371 $1,292
4 $1,400 $1,282 0.93292 $1,306
5 $1,500 $1,196 1.00000 $1,500

The only figure that was adjusted was the Year 5 AWI – but this changed both of the following columns, since their values are based on the Indexing Year’s AWI value. The result is that the Indexed Income, when totaled, comes up to only $6,396, and when divided by 5 the result is $1,279 – which is $129 less than the figure we got the first time around – nearly a 10% reduction!

Hope that example helps you to understand what is so important about the Indexing year AWI value. Now let’s put this into the context of your own Social Security benefit.

Your own Social Security benefit

I explained briefly above how your Social Security benefit is calculated, and the example should have helped you understand the importance of the Indexing Year’s AWI. Now let’s talk about what’s about to happen in 2020 – real life.

Back in the first quarter of 2020 (remember way back then?) the economy was booming. Employment was at all-time highs, based on the number of people employed. And then, the coronavirus pandemic hit. More people than ever before have been affected by layoffs and furloughs, as well as complete evaporation of their jobs. 

So – two takeaways that are important to the process – remember how I explained that the AWI is determined by taking the total wages earned by everyone in the year and dividing that figure by the number of people earning? The first part of that equation is very, very likely to be smaller in 2020 than it was in 2019 – because there has been a period of more than 8 weeks so far (out of 52, 15% of the year and climbing) where a significant number of those people who were earning at the beginning of the year have not been earning, or are earning significantly less than before. And the second part of the equation hits just as hard: more people than ever before were in the workforce, so the divisor is that much larger.

As a result, it is projected at this time that the AWI for 2020 is likely to be as much as 6.7% less than the anticipated AWI for 2019. (These figures are produced 1 year in arrears, and so the 2019 AWI will be released in October, 2020, and the 2020 AWI won’t be released until October, 2021.)

So the result is that, for those folks who are reaching age 60 in 2020, your Indexing Year AWI will be lower than anyone could have possibly guessed it might be. Social Security’s actuaries had projected an increase for 2020 of approximately 3.5% over the projected 2019 figure. 

In addition to affecting your overall average indexed earnings, the AWI Index Year also impacts the final calculation of your benefits (see Primary Insurance Amount for more details.)

It is estimated that this anomaly across these two calculations will result in a loss of more than $2,500 a year in Social Security benefits for the average person, when compared to the previously-anticipated AWI figures. Assuming this person receives benefits for approximately 18 years, a total of more than $45,000 in benefits is lost. The figures will be higher or lower depending on your benefit amount, the age you start benefits, and how long you receive benefits, of course.

What can be done about this?

Each person individually can’t do much about this situation. Starting Social Security benefits earlier or later won’t help. The only way this can be resolved is if Congress takes up the matter to make a one-time (hopefully!) adjustment to the AWI series.

How likely is it that Congress will take action? First, consider that this situation has occurred twice in the past: in 1977 through 1981, due to a change in the process, and more recently in 2009, from impact of the Great Recession. 

During 1977 to 1981 – this is the infamous “notch babies” period – since the anomaly was a result of an intended change to the rules, it’s not surprising that no Congressional action was taken.

So we have the Great Recession as a recent economic downturn to use as a guide – and once again, Congress did not take action to resolve this situation. So folks who reached age 60 in 2009 (born in 1949) had the exact same issue that those reaching 60 in 2020 are facing, and Congress did not make any changes then. So the outlook isn’t good.

However, one thing that is working in favor of a possible adjustment for folks born in 1960: it’s an election year, and Congress has been throwing money around like drunken sailors. If we can get them to pay attention to this problem, maybe they’ll do something about it – if for no other reason than to buy favor from this group of folks born in 1960. I suggest contacting your congress-people immediately, and get this issue on their plates ASAP.

I should also note – given that we have no idea whether the economy we’re seeing up to this point in 2020 will recover over the remainder of the year, or whether it will continue to languish and unemployment remains high, there’s certainly no guarantee that this same situation won’t continue for folks born in 1961 and beyond. It’s way to early to start worrying about that, and of course, worrying about it isn’t going to resolve it. 

Facing the Possibility of Incapacity

incapacity disability

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Incapacity means that you are either mentally or physically unable to take care of yourself or your day-to-day affairs. Incapacity can result from serious physical injury, mental or physical illness, advancing age, and alcohol or drug abuse.

Incapacity can strike anyone at anytime

Even with today’s medical miracles, it’s a real possibility that you or your spouse could become incapable of handling your own medical or financial affairs. A serious illness or accident can happen suddenly at any age. Advancing age can bring senility, Alzheimer’s disease, or other ailments that affect your ability to make sound decisions about your health, or to pay your bills, write checks, make deposits, sell assets, or otherwise conduct your affairs.

Planning ahead can ensure that your wishes are carried out

Designating one or more individuals to act on your behalf can help ensure that your wishes are carried out if you become incapacitated. Otherwise, a relative or friend must ask the court to appoint a guardian for you, a public procedure that can be emotionally draining, time consuming, and expensive. An attorney can help you prepare legal documents that will give individuals you trust the authority to manage your affairs.

Likelihood of Suffering an Incapacity

According to the Center on Budget and Policy Priorities, an individual age 20 has a better than 1 out of 4 chance (26%) of suffering a disability at some point in their life prior to Social Security full retirement age. That’s a pretty significant figure – look around you, if there are 12 people in your office, 3 of them are slated to have a disability at some point in their lives.

Managing medical decisions with a living will, durable power of attorney for healthcare, or Do Not Resuscitate order

If you don’t authorize someone to make medical decisions for you, medical care providers must prolong your life using all available artificial means, if necessary. With today’s modern technology, physicians can sustain you for days and weeks (if not months or even years). If you wish to avoid this (not only for yourself, but for your family), you must have an advanced medical directive executed.

There are three types of medical directive: 1) living will; 2) durable power of attorney for healthcare; and 3) do not resuscitate order (DNR). You may find that one, two, or all three types of advanced medical directives may be necessary to carry out your wishes for medical treatment (just make sure all documents are consistent).

A living will allows you to approve or decline certain types of medical care, even if you will die as a result of the choice. However, in most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, a living will can be used only to decline medical treatment that “serves only to postpone the moment of death.” Even in states that do not allow living wills, you might want to have one anyway to serve as evidence of your wishes.

A durable power of attorney for healthcare (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will have.

Lastly, the Do Not Resuscitate order (DNR) is an order that tells all medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs: one is effective only while you are hospitalized; the other is used while you are outside the hospital.

Managing your property with a living trust, durable power of attorney, or joint ownership

If no one is ready to look after your financial affairs when you have an incapacity, your property may be wasted, abused, or lost. You’ll need to put in place at least one of the following options to help protect your property in the event you become incapacitated.

You can transfer ownership of your property to a revocable living trust. In that case, you name yourself as trustee and retain complete control over your affairs as long as you retain capacity. If you become incapacitated, your successor trustee (the person you named to run the trust if you are unable) automatically steps in and takes over the management of your property. A living trust can survive your death. There are, of course, costs associated with creating and maintaining a trust.

A durable power of attorney (DPOA) allows you to authorize someone else to act on your behalf. There are two types of DPOAs: a standby DPOA, which is effective immediately, and a springing DPOA, which is not effective until you have become incapacitated. A DPOA should be fairly simple and inexpensive to implement. It also ends at your death. A springing DPOA is not permitted in some states, so you’ll want to check with an attorney on the availability.

Another option is to hold your property in concert with others. This arrangement may allow someone else to have immediate access to the property and to use it to meet your needs. Joint ownership is simple and inexpensive to implement. However, there are some disadvantages to the joint ownership arrangement. Some examples include:

  1. Your co-owner has immediate access to your property;
  2. You may lack the ability to direct the co-owner to use the property for your benefit;
  3. Naming someone who is not your spouse as co-owner may trigger gift tax consequences; and
  4. If you die before the other joint owner(s), your property interests will pass to the other joint owner(s) without regard to your own intentions, which may be different. You’ll need to coordinate any joint ownership with your last will and testament as part of an overall estate plan.

The Gift of Time

Some thoughts that may help give some perspective with the extra time some of us may have.

Roth Conversion Planning for a Small Business Owner or Farmer


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Continuing with the discussion about Roth IRA conversions – there is an opportunity for the small business owner or farmer that may be quite useful. Many small business owners and farmers have large Net Operating Loss (NOL) carryovers from previous years, due to the fact that NOL can only be deducted to the extent of the individuals’ Adjusted Gross Income. Beginning with tax year 2018, excess NOL can be carried over indefinitely, but can only offset 80% of the taxable income for the year of the return.

Prior to the Tax Cuts and Jobs Act (2018) NOL carryforward was limited to 20 years, but could offset 100% of the taxable income. In addition, not germain to this article, TCJA also eliminated the 2-year carryback NOL for all taxpayers except for farmers. Any NOL prior to 2018 uses the old rules.

For the small business owner or farmer who has retired and closed his business, a large NOL can be difficult to take advantage of – especially if his income requirement is small in relation to the carried forward NOL. If the small business owner or farmer has an IRA, there is a unique opportunity for a Roth conversion, up to an amount equal to the carried over NOL, thereby converting the funds to a tax-free account with no tax owed.

The reason that this is important is because carried over NOL disappears when the taxpayer dies. If the NOL is large enough that normal income (or Required Minimum Distributions) doesn’t utilize the NOL completely, then this opportunity can help to create tax-free income for the taxpayer in the future.

Note: estates and trusts can also have NOL, but this provision is not pertinent to estates and trusts.

Thoughts On Emergency Funds

Given the recent events and changes occurring for many individuals, it may be time to consider or reconsider your emergency fund, it’s length (amount) and funding. Enjoy!

401k Distributions Due to Coronavirus (CRDs)

401k distributions due to coronavirus

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With the scourge of the coronavirus pandemic, many of us are in a serious financial position. In these dire situations, we may need to withdraw funds from retirement accounts early, in order to just get by. Thankfully, Congress passed a law recently, known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act of 2020, specifically section 2202) which provides a method for taking 401k distributions due to coronavirus related situations. These distributions are known as coronavirus-related distributions, or CRDs. (Note: I’ll refer to 401k throughout, but unless otherwise specified, these rules apply to IRAs, 403b and 457 plans as well. In addition, there are many more provisions in CARES that apply to retirement plans, economic relief payments, etc., but we’re only covering the CRDs here.)

The CARES Act provides a new exception to the 10% early withdrawal penalty on retirement plans, specifically if you have been impacted by the coronavirus.

Normally, if you wanted to withdraw money from your 401k prior to age 59½, your plan would prohibit such a withdrawal unless you have terminated employment, the plan has terminated, or you have experienced a documented “hardship”. And typically, unless you meet one of the exceptions noted in this article – 16 Ways to Withdraw Money From Your 401k Without Penalty – you will be assessed a 10% penalty on your withdrawal prior to age 59½.

With the introduction of this new exception for 401k distributions due to coronavirus, you may be* allowed to withdraw up to $100,000 from the 401k account, regardless of your age, without penalty. In addition, there are special rules regarding how the 401k distributions due to coronavirus are taxed, as well as special provisions for payback of the funds. We’ll get to those special rules and provisions a bit later.

* Like many provisions surrounding 401k plans (and 403b and 457 plans), the plan must specifically offer these special distributions due to coronavirus. There is no requirement that plans must offer them, so you’ll need to contact your plan administrator to find out if yours does allow the distributions due to coronavirus. Since this Act was just recently passed, your plan may allow the special distributions in the future but may not have amended the plan just yet.

What is “impacted by coronavirus”?

How do you know if you’ve been sufficiently “impacted” by coronavirus to qualifity for this special treatment of 401k distributions due to coronavirus? In order to qualify, the recipient of the distribution must meet one of these descriptions:

  • Individual, individual’s spouse, or individual’s dependent (for tax purposes) is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved byt the Centers for Disease Control and Prevention. 
  • Individual experiences adverse financial consequences as a result of being quarantined, or furloughed, laid off, or work hours reduced due to the pandemic.
  • Individual is unable to work due to lack of child care resulting from the SARS-CoV-2 or COVID-19.
  • Individual must close or reduce hours of a business that he or she owns due to the coronavirus.
  • Or other factors determined by the Secretary of Treasury.

The first bullet in the list is very specific and defined: you, your spouse, or your dependent must have been diagnosed with the specific virus by a specific test in order to qualify.

The remaining items are much more subjective and lacking in definition. It is not defined what is meant by “adverse financial consequences”. The good thing about this is that the Treasury is allowing individuals to “self-certify” whether or not “adverse financial consequences” have occurred. Plus, the adverse financial consequences may have occurred after the withdrawal – there’s no specific timeline for the activities, simply that the distribution due to coronavirus occurs in tax year 2020.

The child-care issue is obvious and probably the easiest for parents to meet – since pretty much all schools have canceled in-person classes, this leaves parents in the position of having to find or supply supervision for their children when they would otherwise have been attending school.

And the small business owner is covered with the fourth bullet – but I think it’s clear that the closing or reduction of hours of a business would also produce adverse financial consequences as covered in the second bullet.

The last bullet in the list is, of course, a catch-all providing leeway to the IRS in order to deal with unknown factors that may crop up. Since the CARES Act was slammed together pretty quickly, it’s more likely than not that there will be much need for additional guidance from the IRS on the implementation of these provisions.

How to take 401k distributions due to coronavirus

So now we know the specifics of how to qualify. Taking the distribution is the next step (assuming you qualify, need the distribution, and your plan allows it).

These distributions can be a single distribution or multiple distributions, depending on your circumstances. The only limitation is that the 401k distributions due to coronavirus are only qualified* up to $100,000 during the 2020 tax year. If you withdraw more than $100,000, presumably the excess would be penalized the same as any other withdrawal prior to the passage of the CARES Act.

Any tax-deferred money that you withdraw from your 401k plan will be taxed. Post-tax money, including Roth 401k funds and excess non-deducted 401k contributions, would be tax-free from such a distribution.

Another provision of CARES that helps out: normally a 401k distribution would be subject to an automatic (non-optional) 20% withholding for taxes. CARES eliminates that withholding by default. You are still allowed to designate a portion of your 401k distribution due to coronavirus as withheld for tax (which is probably a good idea if you don’t intend to pay it back).

* By qualified, I mean that those funds are exempted from the 10% early withdrawal penalty if you’re under 59½, as well as given the option of spreading the tax out over three years, plus are entitled to utilize the “payback” provisions. If you’re over 59½, there would be no penalty anyhow, but you may qualify for the other provisions.

Taxation of 401k distributions due to coronavirus

As mentioned above, any tax-deferred money from these distributions will be subject to ordinary income tax. That is, the tax-deferred amount of the withdrawal will be added to your other earned income for tax year 2020 and taxed as ordinary income. This is the same treatment that would always be applied when you take a distribution from your 401k.

What’s different about the 401k distributions due to coronavirus is that, by default, you are allowed to split up the tax over three years. This means that, unless you specify otherwise, 1/3 of your distribution will be included as ordinary taxable income on your 2020 tax return (due in 2021), and then 1/3 will be applied to your 2021 return, and 1/3 on your 2022 tax return.

In many (if not most) cases, this splitting of your tax hit will be the best way to go. However, if your income has been significantly reduced in 2020 and is expected to rebound in 2021, you might want to recognize this distribution as income solely in 2020.

For example, let’s say your normal income is $60,000 per year and you are significantly impacted by coronavirus in 2020, such that your income is expected to be about $20,000 instead. You take advantage of the special rule regarding 401k distributions due to coronavirus, withdrawing $30,000.

If you believe that your income will bounce back to $60,000 in 2021 (or more), then it might make sense to include the full $30,000 withdrawal as income in 2020, since that would put your total income at $50,000 for the 2020 tax year. Otherwise, by splitting the income over 3 years, you’d have $30,000 income in 2020, and $70,000 (or more) in 2021 and 2022.

What isn’t clear is whether you can include, for example, 50% of the income in 2020, and then the remaining 50% evenly between 2021 and 2022. Guidance from the IRS will eventually address this, I’m sure.

In addition, it’s not yet clear whether the decision to pay all of the tax in 2020 is an irrevocable decision. I doubt that it is – presumably you could amend the 2020 return after that decision and only pay tax on the default 1/3, since there will have to be provisions for amending these returns in the event of repayment after 2020 (see below for more).

The payback provision

What I believe is the most valuable provision in CARES with regard to 401k distributions due to coronavirus is the payback provision. Effectively, this special distribution (or distributions) allows you 3 full years to change your mind, and pay back all or a portion of the money you’ve withdrawn.

Normally, you only have up to 60 days to pay back any money withdrawn from a 401k or IRA. Plus, with a 60-day rollover (as this maneuver is called), you must be careful not to breach the one-rollover-per-year rules. However, under CARES, your time limit is extended to 3 years after the withdrawal, and the one-rollover-per-year rules do not apply.

A few things you need to understand about this provision:

  1. The payback is 3 years from the date of the distribution. If you’re intending to pay back the funds withdrawn, you’ll want to put a big red X on your calendar on the date 3 years from the distribution. Otherwise, you may mix it up with the tax payment provision and think that you have until the end of the 2022 tax year to complete the payback.
  2. If you take more than one qualified coronavirus-related distribution in 2020, each distribution will have a different 3-year period for payback. You’ll need to pay attention to these time limits if you’re paying back – see #1 above.
  3. There is no hard and fast rule about the payback – you can decide not to pay the money back, or pay back all or a portion of it during the 3 year period. 
  4. You also may make smaller, periodic payments back into a qualified account – there’s no requirement to pay it all back at once.
  5. Effectively this is a 3-year no-cost loan – other than the intermittent tax payments (that you’ll get back if you repay it all) and your cost of lost tax-deferred gains on the money withdrawn.
  6. The payback is to be made to any qualified retirement plan – so if you took the money from a 401k, you could re-pay the money back into any of the following: the same plan, a new employer’s plan, or an IRA. Note that you could also pay this money via a conversion into a Roth IRA if you wish.

When you pay back the money into an IRA or employer’s plan as tax-deferred, you’ll need to go back and amend the tax returns from prior years that included this money as ordinary income. You’ll do that by filing a Form 1040-X, removing the taxable portion of the 401k distribution due to coronavirus that you are paying back. This could result in a couple years’ worth of tax returns to amend.

Presumably (again, we’ll need IRS guidance on this) if you pay back only a portion of the distribution, you’ll be allowed to amend your return to ratably remove a portion of that income from your prior tax returns.

As mentioned above, these paybacks do not trigger the one-rollover-per-year rules. The CARES Act provision specifically statest that these paybacks are treated exactly the same as a trustee-to-trustee transfer, which is not subject to the one-rollover-per-year rules.

If you were paying attention in #6 above, you’ll notice that I mentioned above that it’s okay (at least presently) to convert your 401k distribution due to coronavirus to a Roth IRA. This might open up some abuse of the system – but at least until we hear otherwise from the IRS, it seems like a viable path.

Effectively, one could convert $100,000 from tax-deferred (like a 401k or traditional IRA) over to a Roth IRA, and then spread out the tax hit over 3 years. I’ve seen one highly-regarded IRA expert’s opinion on this, and it is her expectation that the IRS will get wind of this (if it becomes abused) and either require income inclusion in the year of a conversion to Roth, or possibly even disallow Roth IRAs as a destination for the payback. Stay tuned on this one.

The Net Investment Income Tax and How to Avoid It


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In 2013 a new income tax was added – the Net Investment Income Tax. This tax is an additional tax, at the rate of 3.8%, on investment income above certain levels. The Net Investment Income Tax (NIIT) is actually a Medicare surtax, intended to bolster the Medicare tax rolls in order to help pay for the Affordable Care Act.

Of course, any additional tax reduces your net income, and so we always try to avoid additional tax where possible. This tax rate of only 3.8% is pretty minimal by comparison to the rest of the income tax landscape, but it’s still extra tax. We should try to avoid or minimize this tax if at all possible.

What income is taxed by Net Investment Income Tax?

Net investment income tax is imposed on any net investment income over certain levels (covered below). For the purposes of this tax, net investment income includes (but it not necessarily limited to) the following:

  • interest
  • dividends
  • capital gains
  • rent income
  • royalty income
  • non-qualified annuity distributions
  • “passive activity” income (reported as such on your tax return)
  • income from businesses involved in trading of financial instruments or commodities
  • net gains from the disposition of property

What income is not taxed by NIIT?

Since the above list indicates that it is not necessarily limited to those particular items of income, it’s important to know just what income is specifically not included as taxable under the Net Investment Income Tax. These items are excluded:

  • wages
  • unemployment compensation
  • operating income from a nonpassive business
  • Social Security benefits
  • alimony (from a pre-2019 divorce settlement)
  • tax-exempt interest
  • self-employment income
  • distributions from qualified plans (401(k), 403(b), etc.)
  • distributions from qualified annuities
  • distributions from qualified pensions
  • distributions from IRAs
  • gain on the sale of a personal residence (as excluded by the Section 121 exemption)

Who does the NIIT apply to?

As mentioned earlier, the NIIT only applies when overall income (as calculated by Modified Adjusted Gross Income) is above certain levels.

The Modified Adjusted Gross Income (MAGI) is calculated by first taking your Adjusted Gross Income (AGI, from line 8b of your Form 1040 or Form 1040SR) and adding any income attributable to a Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC), plus any foreign earned income that was excluded by Section 911 (usually reported on Form 2555). For most folks, the MAGI will be the same as the AGI. For more information on CFCs, PFICs and Section 911, see the instructions for Form 8960.

If the MAGI is greater than $200,000 (for single or head of household filers), then any Net Investment Income may be subject to the Net Investment Income Tax. For married filing jointly filers, the threshold is $250,000, and for married filing separately, the threshold is $125,000.

Calculating the Net Investment Income Tax

IRS Form 8960 is used to calculate the Net Investment Income Tax, if you are subject to it. That is, if your MAGI is above the threshold and you have Net Investment Income, you will need to fill out Form 8960 to calculate this additional tax.

Form 8960 simply adds up your total Investment Income, then allows certain deductions – investment interest, state & local income tax, and miscellaneous expenses – to come up with your Net Investment Income.

Next, your MAGI threshold (from above) is subtracted from the Net Investment Income. The resulting figure is compared to the total Net Investment Income – and whichever figure is lower is assessed the Net Investment Income Tax.

For example, if you had Net Investment Income of $50,000 and your MAGI is $225,000 (single filer), you will have $25,000 of Net Investment Income subject to the NIIT. (Subtract the single threshold of $200,000 from your MAGI of $225,000, resulting in $25,000, which is less than your total Net Investment Income of $50,000.)

For another example, let’s say you had Net Investment Income of $20,000 and your MAGI is $300,000 (married filing jointly). All of your $20,000 Net Investment Income is subject to the NIIT. (Subtract the MFJ threshold of $250,000 from your MAGI of $300,000, resulting in $50,000. The total of your Net Investment Income is less than $50,000, so the total Net Investment Income is subject to the Net Investment Income Tax.)

How to Avoid or Minimize NIIT

There are two items that you might be able to control in order to avoid or reduce your exposure to the Net Investment Income Tax:

  1. Your Net Investment Income
  2. Your Modified Adjusted Gross Income (MAGI)

Here are a few strategies you might employ to reduce your Net Investment Income:

  • Tax-loss harvesting – sell your securities that have losses in the same year that you sell securities that have gains, partially (or completely) offsetting the capital gains you must realize on your tax return
  • Use like-kind exchanges (Section 1031 exchanges) to defer gains on the same of property, especially real estate.
  • If you’re charitably-inclined, donate your highly-appreciated securities (instead of cash) to a qualified charity so that the capital gain is not included in your income. You may also qualify for a deduction (if you itemize) for the basis of the donation.
  • Hold high-appreciated securities and other assets to eventually be inherited by your heirs after your death. This eliminates the capital gains via the step-up provisions.

And here are a few ways you might reduce your MAGI:

  • Maximize your deductible contributions to tax-deferred accounts such as 401(k) plans and SEP accounts.
  • Invest in rental real estate, taking advantage of depreciation deductions to limit realized income.
  • Invest in inherently tax-deferred items such as growth stocks, annuities, and insurance products. Income is not realized from these items until sold or withdrawn.
  • Invest in municipal bonds, since the interest from these bonds is tax-exempt. This will reduce your MAGI but will increase your Net Investment Income.
  • Convert funds from traditional IRAs to Roth IRAs. This strategy may result in Net Investment Income Tax in the year of the conversion(s), but future withdrawals of the Roth IRA funds will be eliminated from your MAGI, likely reducing or eliminating Net Investment Income Tax in the future.

As with all of these matters, it makes a lot of sense to consult an investment advisor and definitely your tax advisor before making any drastic moves with your investments.

Make the Most of the Gift of Time

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Time. It’s the one commodity many of us don’t value until we realize it’s running out. Some choose to squander this precious resource, while others spend it doing trivial things – those which don’t improve our lives or the lives around us. Few of us make the most of it.

In the last few months we’ve witnessed unprecedented times with regards to the events changing our realities forever. The communities we live in have slowed down or have come to a screeching halt, yet the people that inhabit them don’t have to.

Many of us are homebound – waiting for the curve to flatten and the biological concerns to run their course. We have a choice to make. We can either sit idle – and let time and life pass us by – or we can be grateful for this gift and make the most of it.

Choose to make the most if it.

And this is not one of those times it’s easier said than done. This is easy. Just choose to act.

What can we do? Here’s a list of ideas to prime the pump so you can make the most of your gift of time.

  • Start a hobby.
  • Learn an instrument (or two or three).
  • Start exercising (walk, run, lift weights, calisthenics).
  • Clean your house and donate stuff you don’t need.
  • Eat better.
  • Improve your relationships.
  • Practice gratitude.
  • If you have kids, invest in your relationship with them. Be present, engaged.
  • Help others.
  • Improve yourself.
  • Learn a new language.
  • All of the above.

It’s only a matter of time (no pun intended) before we emerge from this in a new normal. How will you choose to emerge – the same, or a better version of yourself?

Coronavirus Stimulus Check – 2020 Income Wrinkle


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This post is in response to an email that I received from reader N.B. (you know who you are or will recognize the question – I tried replying to your email but it bounced back to me!). The question refers to someone whose income in 2018 & 2019 was high enough that she will not qualify for a coronavirus stimulus check. But all is not lost for our reader…

Here’s the (edited) question:

N.B.: This is my question.  My actions in 2018 and 2019 put me into AGI of over $200,000 in both years.  That puts me out of qualifying for the $2400 Stimulus check as a married couple.  Since my AGI would be less than $100,000 if I was not doing conversions or NUAs, I am wondering what I should do for 2020.  I am reading that the stimulus check is some type of adjustment on 2020 taxes, so if I keep my 2020 AGI down, can I then qualify for the stimulus check when 2020 taxes are filed?

As I mentioned above, all is not lost. The nature of the coronavirus stimulus check is that it is an advance refundable credit for your 2020 tax return (to be filed in 2021). If it turns out that your income in both 2018 & 2019 was too high to receive the credit in advance (as in, beginning sometime in April, 2020), you may still have a chance to get this credit based on your 2020 income.

When you file your 2020 return in 2021, part of the calculations will consider first what your AGI (Adjusted Gross Income) was in 2018 & 2019, and whether you received a coronavirus stimulus check previously. If your income was too high and you did not receive the credit, your 2020 AGI will then be considered. If your 2020 AGI is below the thresholds ($75,000 for single, $150,000 for married filing jointly), you will be eligible for this credit when you file your 2020 return.

So what about the 2018 income versus 2019?

If your 2019 income is too high to receive the coronavirus stimulus check but your 2018 income was below the threshold – what happens there?

If you have already filed your 2019 tax return, it’s too late. Your applicable AGI will come from the 2019 return, and you can’t retract it. However, since you don’t have to file the 2019 return until as late as July 15, 2020 (or even as late as October 15, 2020 if you extend the return), you might hold off on filing the 2019 return. This way your 2018 AGI will be applied, and you should receive the coronavirus stimulus check. 

Required Minimum Distributions for 2020

required minimum distributions for 2020

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Since the CARES Act was passed, there have been changes to the rules for Required Minimum Distributions for 2020. The gist of it is that, for nearly all defined contribution and personal retirement plans that would normally have required minimum distributions for 2020, the required distribution is waived. Now on to some specifics.

What plans are included?

IRA, 401(k), 403(b), and 457 plans are included. (457 plans by non-governmental entities, such as a credit union, are excluded however.) Additionally, all inherited IRA, 401(k), 403(b), and 457 plans are also included in this waiver.

Any defined benefit plan, such as a pension, is not included in this waiver.

In addition to the above, any person who reached age 70½ during 2019 who had delayed his or her first distribution to April 1, 2020 did not need to take that distribution in 2020. (I realize this is late for you if you were in this boat since April 1 has already passed, but if you missed taking the distribution on time, you should know that you’re okay and you don’t need to take the distribution in 2020.)

Putting it back

If you were at least 70½ in 2019 and have already started taking your distributions, you can avoid taking those required minimum distributions for 2020 altogether.

However, if you had already taken all or a portion of your scheduled required minimum distributions for 2020, you have a couple of options.

First, if you took the distribution within the previous 60 days, you can roll it back into the IRA with no consequences. However, you must also have not done any other indirect rollovers within the previous 12 months, or you will have violated the one-rollover-per-year rule.

If you had another rollover within the prior 12 months, you have a couple more options to consider if you want to undo a distribution for 2020. If you have a 401(k) plan, you could rollover the money into the 401(k) plan with no consequences (assuming your plan allows rollovers). These rollovers are not subject to the one-rollover-per-year rule.

If that’s not available to you, you could convert the distribution to a Roth IRA. If you’re going to have to pay tax on it anyway, and since it’s not considered a required minimum distribution for 2020, this is available to you. You’ll still be out the cost of the taxes, but you could at least preserve the tax-deferral on the funds.

Lastly, there are the CARES Act special distribution rules that might help. Since CARES allows for a distribution and potential re-payment of money from an IRA or other plan if you have been impacted by COVID-19, this failsafe might work. If you have had an impact from COVID-19 (and IRS is still working on exactly what that means but it’s expected to be very liberal), you might be able to re-contribute or pay back any distributions into your IRA or other retirement plan within 3 years with no tax consequences. Something to keep in mind if you find yourself in this position. At the very least you may be able to spread the taxation on your distributions out over 3 years.

Inherited Accounts

Unfortunately, inherited IRA, 401(k), 403(b) and other retirement plans do not have the option of re-contributing or repaying any required minimum distributions for 2020.

Inherited accounts do not have a 60-day rollover window. This is because any moves between one account and another (of inherited funds) must always be done via a trustee-to-trustee transfer, rather than via the 60-day rollover. Administratively there is simply no way to put money back into an inherited retirement account, so it just cannot be undone.

The solitary exception to this rule is, of course, the spouse-beneficiary of an IRA who is treating the IRA as his or her own account or who has previously rolled over the account into his or her own account. Then the IRA is treated the same as if it was not inherited.

Government Retirement Plans After SECURE Act

government retirement plans

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The SECURE Act made sweeping changes to the rules for most inherited retirement plans, effective January 1, 2020. However, not all inherited retirement plans are changed by that date. If plan in question is a government retirement plan, such as a 457 or 403(b) plan, the implementation date is January 1, 2022. There are a few other cases when 2022 is the implementation date as well.

Specifically, the 10-year distribution rule goes into effect in January 2022 for the following two situations:

  • Plans maintained pursuant to a collective bargaining agreement (unless the collectively bargained agreement terminates sooner).
  • Governmental plans, such as 403(b) and 457 plans sponsored by state and local governments, and the Thrift Savings Plan (TSP) sponsored by the Federal government. Not surprising, this includes the TSP that congress-people are participants in.

These government retirement plans use the old rules for inheritances occurring during 2020 and 2021, but beginning in 2022 the new rules will take effect. At that time, unless you are considered an Eligible Designated Beneficiary (see below), if you’ve inherited one of these plans you’ll need to distribute the entire account within 10 years. There is no annual distribution requirement, as long as the account is fully distributed within 10 years of the death of the original owner.

As a refresher, Eligible Designated Beneficiaries are:

  • Spouse beneficiaries
  • Minor child (of the original owner) beneficiaries
  • Disabled beneficiaries
  • Chronically Ill beneficiary
  • Beneficiary who is not more than 10 years younger than the original owner

Each of these beneficiary classes has the option of using the old-style of required distribution of inherited IRAs, utilizing the individual beneficiary’s own lifetime as the period over which to distribute the account.

If you inherit government retirement plans after 2022 and you’re not one of the above-listed Eligible Designated Beneficiaries, you are stuck with the 10-year payout rule.

Lastly, there is one additional exception to the January, 2020 implementation date:

Annuities in which individuals have already irrevocably annuitized over a life or joint life expectancy, or in which an individual has elected an irrevocable income option that will begin at a later point, are exempt entirely (and simply follow the already-binding contractual provisions of the annuitized contract).

IRA Early Withdrawal Exception: Disability to the IRA Owner

As discussed elsewhere in this blog, one of the 72(t) exceptions for IRA early withdrawal is due to disability. However, a recent tax court decision cemented the fact that the disability in question only applies if the owner of the IRA is disabled. It is not enough that the spouse of the IRA owner is disabled.


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In a recently-issued TC Summary Opinion 2020-5, the case at hand was argued that the taxpayer had taken a qualified IRA early withdrawal of funds prior to his age 59½ due to his spouse’s disability (there were other issues with the tax return, this factor is explained last on the Opinion). 

The Tax Court acknowledges that Section 72(t)(2)(A)(iii) allows for an exception to the 10% penalty if the employee is disabled within the meaning of Section 72(m)(7). As defined in Section 72(t)(5), the term “employee” means “the individual for whose benefit such plan was established”.

Since the plan was established in the name of the husband, he is considered the “employee”. The husband was not disabled at the time of the early withdrawal. The wife was disabled, but no IRA early withdrawal was made from an IRA established for her benefit. Therefore, the 10% penalty for early withdrawal of IRA funds applies in this case.

If a withdrawal had been made from an IRA in the wife’s name, or if the husband had been the one disabled, either circumstance would have allowed for the exception to the early withdrawal penalty.

There are many other exceptions to the IRA early withdrawal penalty, and you can find out more about those in the article 19 Ways to Withdraw IRA Funds Without Penalty. For an employer plan, such as a 401(k), you might read 16 Ways to Withdraw Money From Your 401k Without Penalty.

Choosing a Beneficiary for Your IRA

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One of the very important tenets of estate planning is to ensure that you’ve made an appropriate choice, or set of choices, for beneficiary(s) of your IRA account(s).  The title of this article could be a bit misleading – the point of this article is to list some of the consequences of various choices for a beneficiary of your IRA.

Don’t get me wrong – this article doesn’t suggest that the tax consequences should drive your choice of beneficiary(s).  Rather, the assumption here is that you have several beneficiaries to choose from, and other classes of assets that you can direct toward heirs that aren’t as able as others to take advantage of the tax-favorable provisions.

Following are the benefits and consequences of some of the major groupings of choices that you might make for beneficiary(s) of your IRA.


Younger Individual

Now that the rules have changed (with the SECURE Act), a younger individual as a beneficiary may make sense in some cases, but not all.

If the younger individual is your own child, and is under the age of majority, choosing this individual as a beneficiary can allow for a longer payout period than other choices. Since the child is under the age of majority, this makes him or her an Eligible Designated Beneficiary. With that designation, the minor child can stretch out inherited IRA distributions. The period of time over which the child can stretch these distributions is based on his or her age when the IRA is inherited.

From the age of inheritance up to the age of majority (18 in most states, 21 in some others), the heir-beneficiary must take annual distributions from the IRA based on his or her age, using IRS Table I. Once the child reaches the age of majority, the ten-year payout rule becomes effective, meaning that the remaining IRA must be distributed within ten years – but there is no annual minimum withdrawal requirement.

On the other hand, if the younger individual is not the child of the original IRA owner, the ten-year rule applies, unless the heir-beneficiary is 1) disabled or  2) chronically ill (a third option follows below). These are two of the other Eligible Designated Beneficiaries, who are allowed to stretch out inherited IRA withdrawals over their lifetimes, with an annual withdrawal required each year.

Older Individual

If you choose an older individual as the beneficiary of your IRA, this heir can also take advantage of the life expectancy payout method – if the individual is within 10 years of your age, or is older than you. This Eligible Designated Beneficiary may stretch out inherited IRA withdrawals over his or her lifetime as well.

If the individual you’ve chosen is more than 10 years younger, the ten-year withdrawal rules apply, and the withdrawal activities can’t be stretched past that time limit without severe penalty.

Spouse (any age)


If you leave your IRA directly to your spouse by name, he or she can elect to treat the inherited IRA as his or her own IRA.  This means that your spouse will be able to defer distributions from the account until he or she reaches age 72, and then use the Uniform Life Table for distributions.  As you may know, the ULT is much more favorable than the Single Lifetime Table, which is the one required to be used by owners of inherited IRAs not otherwise required to use the ten-year payout.  Your spouse can also name his or her own beneficiary for any amounts remaining in the IRA at his or her death – which provides for additional deferral in the account.

In Trust

If instead, you decide to leave your IRA to your spouse via a trust (even a look-through trust), you remove the possibility for your spouse to assume ownership of the IRA (as described above).  By doing so, the account must be treated as an inherited IRA, subject to the immediate Required Minimum Distributions from the account, regardless of the age of your spouse.  Further deferral of taxes is limited in many cases, since if the spouse is younger than 72 he or she has to take distributions now rather than delaying until age 72.  In addition, your spouse will be required to use the less-favorable Single Lifetime Table for the distributions; your spouse also cannot name his or her own beneficiary for the account for further deferral after his or her death.

Now, if the spouse is the sole beneficiary of the trust, the account can be treated as if it were directly inherited by your spouse, as in effect the look-through trust becomes a conduit trust.  With a conduit trust, the effect is the same as specifically naming your spouse the sole beneficiary of the account – so the same rules apply as when you leave the account directly to your spouse.  The only difference is that you’ve spent extra money drafting the trust agreement.

Other Beneficiary Options

Group (versus Individual)

Leaving your IRA to a group of people instead of one person can introduce quite a bit of complexity to the situation.  Where possible you might split your IRA into separate accounts and direct each account to an individual beneficiary, saving your heirs a lot of extra headaches at your passing.  If this is not possible or you would prefer not to split your account your heirs can do it later – it’s just a lot of extra paperwork for them that you could have handled for them in advance.  See this article for additional information on splitting inherited IRAs.

In addition to the paperwork, your heirs might run into problems if there is a mix of Eligible Designated Beneficiaries and regular eligible beneficiaries. Even more complex would be if there is a non-designated beneficiary in the mix as well. Suffice it to say that it’s much easier if you split up your IRA and leave separated accounts to the various classes of beneficiary if the need arises.


As tax-exempt entities, charities do not have to pay tax on any donations.  So if you choose to name a charity as beneficiary of your IRA, there are no tax consequences on an asset that would otherwise be fully subject to ordinary income tax.  This can be a very tax efficient way to provide charitable bequests – leaving your more tax-favorable assets to non-charity recipients.

Your Estate

If you choose to leave your IRA assets to your estate – either intentionally by naming your estate as beneficiary, or unintentionally by not naming a beneficiary or by naming a non-look-through trust as your beneficiary – longer-term tax deferral benefits are lost. Estates and non-look-through trusts have no life expectancy, therefore there is no life expectancy payout option.  This is not to say that there are no good reasons to choose your estate as beneficiary of your IRA – but that’s a topic for another post…

Bottom Line

As I mentioned before, you should not cause the tax code to be the determining factor when choosing a beneficiary.  You should leave your assets to whomever you wish.  You can, however, use the information on this page to help guide your process of choosing a beneficiary, making tax-efficient choices.  Making thoughtful decisions about this process can ease the tax burden for your heirs.

IRA Stretch Strategy for Married Couple

ira stretch

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The SECURE Act has limited non-spouse beneficiaries (with a few exceptions) to a maximum of a ten-year stretch for IRA payouts. Because of this, the search is on for strategies to make the most of the new rules. One method is specifically for a married couple, allowing the children or grandchildren to have two ten-year payouts.

This only works if the surviving spouse (after the death of the first spouse) doesn’t necessarily need the funds (or not all of the funds) from the first spouse’s IRAs.

When the first spouse of a married couple dies, if the beneficiaries of his or her IRA are all designated beneficiaries (not Eligible Designated Beneficiaries), then they will have the 10-year payout available to them on the inherited IRA funds.

Then, when the second spouse dies, assuming it’s the same group of beneficiaries, they’ll have another 10-year period for their inherited IRA payout.

Say Lisa and Paul are a married couple and each has an IRA. Lisa’s IRA is $500,000, and Paul’s is $200,000. They also have other funds available to them, in addition to pension and Social Security, such that when either of them dies, the IRA money needed for the survivor has been determined to be only about $300,000. 

One way this could work out would be for Lisa to designate Paul as the primary beneficiary and their two children as contingent beneficiaries on her account. Paul could simply designate the children as primary beneficiaries, or he could also designate Lisa as the primary with the children as contingent beneficiaries.

Let’s say Paul dies first. Upon his death, if Lisa was the primary and the children contingent beneficiaries, if Lisa is certain that she will not need the money in Paul’s IRA for living expenses, she could disclaim the entire IRA, leaving it to pass along to their two children. The children (not minors) could then have a ten-year period over which to withdraw their portion(s) of the IRA.

Five years later, Lisa dies. At this stage, since Paul predeceased Lisa, if no changes were made to the beneficiary designations (that is, Paul is still the primary and the children are contingents), then the children would step into the primary beneficiary role, and each would have a new ten-year payout period for the funds from Lisa’s IRA.

Complicating this a bit more, what happens if Lisa dies first? Paul determines that he only needs $100,000 from Lisa’s IRA for living expenses, so he disclaims all but $100,000, transferring that $100,000 over to his own IRA. The children have 10 years to withdraw the remaining $400,000 from Lisa’s IRA.

Upon Paul’s death 5 years later, again, nothing being changed about the designations, the children are now the primary beneficiaries of the remaining $300,000 from Paul’s IRA, and they have 10 years to withdraw that money.

By taking this action, assuming no reductions to the account values, in the first instance where Paul died first and Lisa died 5 years later, the children have a total of 15 years over which to withdraw the $700,000 of IRA funds. This can have a significant impact on the taxation of these funds, since they can draw out the number of tax returns upon which to claim all of this ordinary income.

If this married couple had not worked out a strategy like this and after the death of the first the entire balance of the first-to-die’s IRA was transferred to the surviving spouse (as is quite common), then the children would be limited to a single ten-year withdrawal period after the death of the second-to-die.

The difference in this instance is that the children have an additional five years to spread out the tax hit from the inherited IRAs.

The downside of this strategy for a married couple is that once the surviving spouse disclaims the money from the first-to-die’s IRA, they have no recourse (other than family obligations, of course) to access that money if an emergency were to arise. And naturally, if the expectation (or fear) is that the surviving spouse may need the money from the first spouse’s IRA, then you would not want to undertake such a strategy at all.

Beyond 401(k) and IRA


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You’re contributing as much as you’re allowed to a 401(k) or other employer-sponsored retirement plan. If your income allows it, you’re also contributing the maximum annual amount to your Roth or traditional IRA. But you still want to set aside more money beyond 401(k) and IRA, to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider…

Before moving beyond – are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you’re really contributing all you can.

In 2020, most individuals can contribute up to $19,500 to a 401(k) plan, and up to $6,000 to a traditional or Roth IRA (subject to income limitations). If you’re age 50 or better, though, you can make up to an additional $6,500 in “catch-up” contributions to your 401(k) in 2020, and an additional $1,000 to your traditional or Roth IRA. What’s more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (See Spousal IRAs for Stay at Home Parents for more details.)

Above and beyond the deductible limit described above, most 401(k) plans also allow for non-deductible contributions. The limit for all contributions to your 401(k) plan, including deductible and non-deductible contributions and the over-50 catch-up, is $63,500 for 2020. The great benefit to the non-deductible contributions is that you can be eligible to rollover these non-deducted contributions directly to a Roth IRA (subject to plan restrictions). This is known as the mega-backdoor Roth IRA contribution, and it can really be a big deal.

Taxable investment accounts

Your other primary option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You have a tremendous amount of flexibility. You can choose from a virtually unlimited selection of investments, and there’s no federal penalty for withdrawing funds before age 59½.

Investment options worth mentioning:

  • Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
  • Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
  • Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

The other big benefit of a taxable account is that if you don’t use the money in the account and it is invested in appreciating assets (like growth stock funds, for example), when you die, your heirs will be eligible for a step-up in basis on the asset value. This way, when the heirs sell the assets, they will only be taxed on growth of the assets after your death. The growth from the time you purchased the asset until your death is completely tax-free (subject to possible estate taxation at state and federal levels).

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

For many, it can be useful to have some of your money invested in the three different types of tax-treated accounts: tax-deferred, such as a 401(k) or traditional IRA; ultimately tax-free, such as Roth IRAs; and taxable investment accounts, which take advantage of the flexibility of withdrawal and low capital gains rates. With a three-pronged approach you can plan your tax impact when you need to withdraw money. Instead of only having purely taxable withdrawals from a 401(k) plan, you might take only a portion of the withdrawal to be taxed in that fashion, and a portion to be taxed at capital gains from your non-deferred account. This provides you with the best of all worlds!

RMDs From IRAs

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I’ve made the observation before – IRAs are like belly-buttons: just about everyone has one these days, and quite often they have more than one.

Wait a second, maybe they’re not quite like belly-buttons after all.

Oh well, you get the point – just about everyone has at least one IRA in their various retirement savings plans, and these accounts will eventually be subjected to Required Minimum Distributions (RMDs) when the owner of the account reaches age 72. (This just changed with the passage of the SECURE Act in 2019 – it used to be 70½.)

So what are RMDs from IRAs, you might ask? When the IRA was first developed, it was determined that there must be a requirement for the account owner to withdraw the funds that have been hidden from taxes over the lifetime of the account. Otherwise the IRS would never benefit without the taxes that are levied against the account withdrawals. To facilitate the forced withdrawals, a schedule was prepared approximating the life span of the account owner year after year. This schedule prescribes a minimum amount to be withdrawn each year that the account owner is alive, until the account is exhausted.

A participant in a traditional IRA (Roth IRAs are not subject to RMD rules by the original owner) must begin receiving distributions from the IRA by April 1 of the year following the year that the participant reaches age 72. In other words, assuming that the participant reaches age 72 during the 2021 calendar year, 2021 is the first RMD year.  Therefore, the first RMD must be withdrawn before April 1, 2022.

If you were born before July 1, 1949, you are subject to the old rule, which indicates that your first RMD year is the year that you reach age 70½.

After that first year’s RMD is withdrawn, the second year’s RMD must be taken by December 31 of the same year. For all subsequent years, the RMD must simply be withdrawn by December 31 in order to be credited for that year.

If you don’t want to double up the distributions for your first and second RMDs, you can take the first RMD by December 31 of the year you reach age 72. By taking your first and second RMDs as originally described (first one by April 1 and then another by December 31), you will be taxed on both distributions in a single year. This might result in adverse taxes to you.

Calculation of RMDs from IRAs

Calculation of the RMDs from IRAs is fairly straightforward, although there is some math involved. For the first year of RMD, the participant is age 72. IRS determines your applicable age based on your age at the end of the year. According to the Uniform Lifetime Table (See IRS Publication 590 for more detail on other tables), the distribution period for a 72-year-old is 25.6.

Jerry has IRAs worth $100,000 at the end of the previous year and will be 72 at the end of the current year. Jerry will divide the balance of $100,000 by 25.6 to produce the result of $3,906.25 – the RMD for his first year.

Each subsequent year, Jerry reviews the balance of his accounts on December 31 of the previous year. Jerry looks up the distribution period from the Uniform Lifetime Table for his attained age for the current year. He then takes the balance and divides by the factor for his current year, producing the RMD amount. Then Jerry just has to take a distribution of at least that amount (the RMD) during the calendar year.

Note, I made a point of indicating that you calculate your RMD based on the balance of all of your IRAs. This is because the IRS considers all of your traditional IRAs as one single account for the purpose of RMDs. You are required to take RMD withdrawals based on the overall total of all IRA accounts (only traditional IRAs, not Roth IRAs). This withdrawal can be from one IRA account, evenly from all IRA accounts, or in whatever combination you wish as long as you meet the minimum distribution for all IRA accounts that you own.

It’s different for RMDs from non-IRA retirement accounts. With the exception of 403(b) plans, employer plans cannot be aggregated to determine RMDs. But that’s a subject for another time.

Another point that is extremely important to note: taking these distributions is a requirement. Failing to take the appropriate distribution will result in a penalty of 50% (yes, half!) of the RMD that was not taken. As you can see, it really pays to know how to take the proper RMDs from IRAs.

Understand that the examples I’ve given are for simple situations, involving the original owner of the account and no other complications. In the case of an inherited IRA or other complicating factors, or if the account is an employer’s qualified plan rather than an IRA, many other factors come into play that will change the circumstances considerably. If you need help on one of these more complicated situations, it probably would pay off in the long run to have a professional help you with the calculations.

2019 Social Security Survey Results

In November and December, 2019, I sent out a survey covering Social Security filing strategies. The survey was sent to a closed Facebook group (dealing primarily with Social Security filing strategies), as well as to my blog readership and Twitter followers.

If anyone would like to see the actual unscrubbed survey data, please send me a note at and I’ll set you up. I’ll be interested in hearing your insights after reviewing the data!

– jb

Given the sources of respondents, it’s safe to assume that this group of people is on the higher end of the scale of knowledge about Social Security rules and the like when compared to the general population. When you add in the ages of the respondents (median was the 60 to 65 range), I’d say this group is probably as educated as most folks can expect to be about Social Security. This is a strong factor, in my opinion, in the results that we saw.

After scrubbing the data, there was a total of 412 respondents, and 351 of those reported on both their own strategy and their spouse (or ex-spouse, or late spouse). The age of the group was as follows:

It’s not surprising that the lion’s share of the respondents are in the range of 60-70 (approximately 70% overall) given the audience and the topic of Social Security filing.

Of those surveyed, we asked who had already filed (along with whether their spouses had filed). Roughly 2/3 of the group has not filed, as shown below (this includes both the survey taker and his or her spouse):

Next question was about Social Security filing age. I combined the responses together for all filing strategy ages and statuses for the following information. By this I mean that the following three charts include all respondents, regardless of whether the individual had already filed or was still planning to file. This first chart includes all filing ages as well (we’ll break down the ages a bit in the next two charts after this one):

Splitting the chart above between those over age 60 and those under age 60, gives us a different perspective. First, the intended or actual filing of for those over age 60:

Next is the intended filing age for those surveyed that are under age 60:

The younger group isn’t looking to file at age 66 hardly at all compared to the older group – and of course they wouldn’t be, since the FRA is up to age 67 for those who are reaching 60 in 2020 or later (i.e., those age 59 or younger). What is surprising is that the younger group is twice as likely planning to file at 62 versus the older group. I wonder if this is a trend, or if the perspective of age will cause a change to strategy as these folks get closer to filing age(s)?

The next breakdown I did was between those who have already filed, and those that have not filed yet. First, we’ll look at the actual filing ages of those who have already filed:

And here are the expected filing ages for those who have not already filed:

Interesting results between these two groups. The group that has already filed did so at age 66 or FRA more than one-third of the time. Contrast that with roughly 28% of those who have not filed yet who are planning to file at age 66, 67, or FRA. On the other hand, 36% of the group that has not already filed is planning to file at age 70, compared to only 13.6% of the respondents who already filed and did so at age 70. This is nearly triple the rate.

Again I’m not sure whether this is a trend or if when the chips are down, the actual filing ages may be closer to FRA for a portion of that group who presently indicates a plan to file at age 70. Or perhaps the remaining group (those who have not yet filed) is just more inclined to delay in order to maximize benefits. That could be the reason they were involved in the communities that were targeted and surveyed. Also, keep in mind that the respondents over age 70 in the survey only amounted to approximately 9% overall.

We next polled the group regarding their reasons for filing. This gives us a bit of insight into some of the “why” of filing strategies.

Below are the results of filing strategy reason for respondent and spouse – and why they chose their particular strategy. These responses were partly defined but allowed for a free-form response. The free-form responses have been summarized by general reason. The first chart is for the filing strategy reason for who have already filed:

And then here are the reasons for choosing a particular strategy for those who have not yet filed:

Delaying to FRA or to age 70 combined are the most common reasons for choosing a particular filing strategy, for either filing status. For those who are yet to file, these two represent more than 60% of the responses, but only about 36% of those who already filed. As surmised above, I believe this might indicate that filing strategies change as folks get closer to actual filing age(s).

The next most common answer in both groups was to start benefits as soon as possible. This is what we often expect as the most common answer of all, given the general perception by the public that the Social Security system is in jeopardy and they want their benefits now rather than later. Still, among the group this response only garnered 15% (already filed) and 11% (not yet filed), so it’s not as common as I would have guessed.

The closing section of the survey dealt with satisfaction – the question was “Are you satisfied with your filing strategy?” Of the 412 survey takers, 365 (88.5%) were satisfied with their filing strategy. This left 47 (11.5%) who were not satisfied. The “Why not?” question was free-form, with no multiple choice responses pre-set, so the survey takers were free to give whatever reason they wanted. It was surprising that there weren’t more reasons (after my summarization) for dissatisfaction.

The top reasons for dissatisfaction are summarized below:


As you can see, the most common response was dissatisfaction due to the complexity of the system or the fact that the rules have changed. There were so many responses which combined these two factors that it was necessary to report as a combined figure. There was just no easy way to display these two factors separately and accurately. I’ll deal with breaking these two up in a future survey.

Naturally the rule changes have caused havoc with many folks’ plans, and this dissatisfaction is well justified. Furthermore, complexity of the system compounds the issue of the rule changes, apparently causing dissatisfaction among the choices for a given percentage of respondents.

It is somewhat surprising that the next most common response is that the individual had filed (or is planning to file) earlier but would prefer to file later. Unfortunately the survey was not designed to capture the reason behind that choice. I found this a bit surprising that folks are somehow either systematically or by their own circumstances being forced into an earlier filing age than they’d prefer. Again, this is a factor to account for in future surveys.

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