Recently Illinois’ Governor Pat Quinn signed into law the Illinois Secure Choice Savings Plan. This plan provides an automatic Roth IRA via payroll-deduction for some employees who do not have an employer-sponsored retirement savings plan. Essentially this law will require employers with 25 or more employees to establish a payroll deduction program permitting the workers to defer earnings into a Roth IRA, beginning in June 2017. Employees will be automatically enrolled (hence an automatic Roth IRA), but the workers will have the opportunity to opt out of the program. The automatic enrollment includes a 3% salary deferral, but the employee can increase the deferral amount, up to the legal limitations (in 2015 it’s $5,500, $6,500 for folks over age 50). There is no company matching with this program.
IRA
Where to Start With Retirement Savings
Today, we have so many choices for our retirement savings that it can be difficult to choose which sort of account to contribute to. If you are fortunate enough (as many are) to have more than one type of retirement plan available to you, in what order should you contribute to the accounts? Right now, at the beginning of a new year, is an excellent time to start with retirement savings. Qualified Retirement Plans First of all, many folks who are employed by a company have some sort of tax-deferred, qualified, retirement savings account available. These accounts go by many names – 401(k), 403(b), 457, and deferred compensation. These accounts are collectively referred to as qualified retirement plans, or QRPs. QRPs do not include IRAs – this is another type if retirement savings account with some different rules. A QRP account is a good place to start when contributing to […]
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2015 IRA MAGI Limits – Married Filing Separately
Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility. For a Traditional IRA (Filing Status Married Filing Separately): If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions. If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200. If you are covered by a retirement […]
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2015 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)
Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility. For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)): If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions. If you are covered by a retirement plan at work, and your MAGI is $98,000 or less, there is also no limitation on your deductible contributions to a traditional IRA. If you are covered by a retirement plan at your job and your MAGI is more than $98,000 but less than $118,000, you are entitled to a partial deduction, reduced by 27.5% for every dollar […]
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2015 MAGI Limits – Single or Head of Household
Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility. For a Traditional IRA (Filing Status Single or Head of Household): If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions. If you are covered by a retirement plan at work, if your MAGI is $61,000 or less, there is also no limitation on your deductible contributions to a traditional IRA. If you are covered by a retirement plan at your job and your MAGI is more than $61,000 but less than $71,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and […]
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What is a QLAC?
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.
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Five Things You Need to Know About Retirement Plans
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 […]
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An Exception to the RMD Rule
For many folks, attaining age 70 ½ means the beginning of required minimum distributions (RMDs) from their 401k, 403b as well as traditional IRAs. There are however, some individuals that will continue to work because they want to or (unfortunately) have to and still want to save some of their income. At age 70 ½ individuals can no longer make traditional IRA contributions. They are allowed to make contributions to a Roth IRA as long as they still have earned income. Earned income is generally W2 wages or self-employment income. It is not pension income, annuity income or RMD income.
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A new way to fund your Roth IRA
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.
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Happy 40th Anniversary, 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 […]
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To Roll or Not to Roll?
At some point in almost everyone’s lifetime they have gone through the process of changing jobs. Many times those jobs offered retirement plans such as 401(k)s 403(b)s, etc. Conventional wisdom would say that for most employees it may make sense to roll their employer sponsored plan into an IRA. Based on a request from a reader (thanks David!), I thought I would go over some of the issues to consider before rolling your employer sponsored plan to an IRA.
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2015 Contribution Limits for Retirement Plans
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.
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IRS Notice 2014-54: Will This Clarify NUA Basis Allocation?
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 […]
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RMD Avoidance Scheme: Birthdate Makes All The Difference
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:
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Using First Year RMD Delay to Your Advantage
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 […]
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How to Deal With Missed Required Minimum Distributions
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 […]
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Annuity in an IRA? Maybe, now
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 […]
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Resurrecting the Qualified Charitable Distribution?
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.
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QDRO vs Transfer Incident to a Divorce
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.
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Types of Rollovers Not Subject to the Once-Per-Year Rule
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 […]
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The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.