If your small business has a retirement plan, and even if it doesn’t, you may see changes and benefits from a new law. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was recently signed into law. Provisions in the law will kick in over several years.
SECURE 2.0 is meant to build on the original SECURE Act, which was signed into law in 2019. Here are some provisions that may affect your business.
Retirement plan automatic enrollment. Under the new law, 401(k) plans will be required to automatically enroll employees when they become eligible, beginning with plan years after December 31, 2024. Employees will be permitted to opt out. The initial automatic enrollment amount would be at least 3% but not more than 10%. Then, the amount would be increased by 1% each year thereafter until it reaches at least 10%, but not more than 15%. All current 401(k) plans are grandfathered. Certain small businesses would be exempt.
Part-time worker coverage. The first SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans with a dual eligibility requirement (one year of service and at least 1,000 hours worked or three consecutive years of service with at least 500 hours worked). The new law will reduce the three-year rule to two years, beginning after December 31, 2024. This provision would also extend the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
Employees with student loan debt. The new law will allow an employer to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” This means that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers into retirement plans. This will take effect beginning after December 31, 2023.
“Starter” 401(k) plans. The new law will allow an employer that doesn’t sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) that would require all employees to be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit with an additional $1,000 in catch-up contributions beginning at age 50. This provision takes effect beginning after December 31, 2023.
Tax credit for small employer pension plan start-up costs. The new law increases and makes several changes to the small employer pension plan start-up cost credit to incentivize businesses to establish retirement plans. This took effect for plan years after December 31, 2022.
Higher catch-up contributions for some participants. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 or older. The catch-up contribution limit for 401(k) plans is $7,500 for 2023. SECURE 2.0 will increase the 401(k) catch-up contribution limit to the greater of $10,000 or 150% of the regular catch-up amount for individuals ages 60 through 63. The increased amounts will be indexed for inflation after December 31, 2025. This provision will take effect for taxable years beginning after December 31, 2024. (There will also be increased catch-up amounts for SIMPLE plans.)
Retirement savings for military spouses. SECURE 2.0 creates a new tax credit for eligible small employers for each military spouse that begins participating in their eligible defined contribution plan. This became effective in 2023.
These are only some of the provisions in SECURE 2.0. Contact us if you have any questions about your situation.
The new Secure Act 2.0 legislation expands upon the Secure Act of 2019 with updates to retirement savings plans across the country. Here’s what you need to know.
Plan sponsors of 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a starting contribution of 3% of their salary beginning in 2025. This amount will increase annually by 1% until the deferral amount reaches 10% of their earnings. Employees can opt-out if they do not wish to enroll in the sponsored retirement plan. This goes into effect for all existing defined-contribution plans if the employer has more than 10 employees and has existed for more than three years. Government and churches are excluded.
In addition, unenrolled participant notification requirements have been eliminated except for an annual reminder of plan requirements and their opportunity to participate.
Over the next 10 years, the age when required minimum distributions go into effect will increase. Here are the highlights:
For those who failed to make their required minimum contribution, the Act reduces the penalty from 50% to 25%.
Certain hardships are eligible for penalty-free early withdrawals from retirement accounts, where retirement account owners are only responsible for applicable taxes instead of the early withdrawal fee. Eligible hardships have been expanded to include victims of domestic violence, terminally ill patients, and certain personal financial emergencies. In addition, victims of qualified federal disasters who have experienced significant financial impact may take an early withdrawal without penalty within 180 days of the disaster.
Currently, taxpayers aged 50 or older can make catch-up contributions to eligible retirement plans, like a 401(k) or IRA. Beginning in 2025, The Secure Act 2.0 increases limits to the greater of $10,000 or 50% more than the original catch-up amount for those aged 60, 61, 62, or 63. In addition, IRA catch-up limits will no longer be set to $1,000 per year but will increase with inflation. In 2024, catch-up contributions will also be subject to after-tax (ROTH) rules.
The Secure Act 2.0 permits qualified 403(b) and governmental 457(b) plans to allow employees to designate employer matching, nonelective contributions, and student loan matching contributions as pre- or post-tax contributions. Take note that Roth-designated employer contributions must be 100% vested.
If a part-time worker has worked for an employer for at least three consecutive years and worked a minimum of 500 hours per year for those three years, the plan sponsor must allow them to contribute to qualified 401(k) plans. Effective for 401(k) and 403 (b) plans beginning after December 31, 2024, the three-year requirement has been reduced to two years.
Beginning in 2023, businesses with 50 employees or fewer can take a credit of up to 100% of the startup costs for workplace retirement plans, up to the annual cap of $5,000. This is an increase from the 50% credit previously offered.
To review how your tax strategy is affected by the Secure Act 2.0, reach out to our team of knowledgeable professionals.
How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.
The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.
The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).
Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.
The IRS also announced that in 2023:
The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.
Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.
What makes Roth IRAs so appealing? Primarily, it’s the ability to withdraw money from them tax-free. But to enjoy this benefit, there are a few rules you must follow, including the widely misunderstood five-year rule.
To understand the five-year rule, you first need to understand the three types of funds that may be withdrawn from a Roth IRA:
Contributed principal. This is your after-tax contributions to the account.
Converted principal. This consists of funds that had been in a traditional IRA but that you converted to a Roth IRA (paying tax on the conversion).
Earnings. This includes the (untaxed) returns generated from the contributed or converted principal.
Generally, you can withdraw contributed principal at any time without taxes or early withdrawal penalties, regardless of your age or how long the funds have been held in the Roth IRA. But to avoid taxes and penalties on withdrawals of earnings, you must meet two requirements:
The withdrawal must not be made before you turn 59½, die, become disabled or qualify for an exception to early withdrawal penalties (such as withdrawals for qualified first-time homebuyer expenses), and
You must satisfy the five-year rule.
Withdrawals of converted principal aren’t taxable because you were taxed at the time of the conversion. But they’re subject to early withdrawal penalties if you fail to satisfy the five-year rule.
As the name suggests, the five-year rule requires you to satisfy a five-year holding period before you can withdraw Roth IRA earnings tax-free or converted principal penalty-free. But the rule works differently depending on the type of funds you’re withdrawing.
If you’re withdrawing earnings, the five-year period begins on January 1 of the tax year for which you made your first contribution to any Roth IRA. For example, if you opened your first Roth IRA on April 1, 2018, and treated your initial contribution as one for the 2017 tax year, then the five-year period started on January 1, 2017. That means you were able to withdraw earnings from any Roth IRA tax- and penalty-free beginning on January 1, 2022 (assuming you were at least 59½ or otherwise exempt from early withdrawal penalties).
Note: If you’re not subject to early withdrawal penalties (because, for example, you’re 59½ or older), failure to satisfy the five-year rule won’t trigger a penalty, but earnings will be taxable.
If you’re withdrawing converted principal, the five-year holding period begins on January 1 of the tax year in which you do the conversion. For instance, if you converted a traditional IRA into a Roth IRA at any time during 2017, the five-year period began January 1, 2017, and ended December 31, 2021.
Unlike earnings, however, each Roth IRA conversion is subject to a separate five-year holding period. If you do several conversions over the years, you’ll need to track each five-year period carefully to avoid triggering unexpected penalties.
Keep in mind that the five-year rule only comes into play if you’re otherwise subject to early withdrawal penalties. If you’ve reached age 59½, or a penalty exception applies, then you can withdraw converted principal penalty-free even if the five-year period hasn’t expired.
You may be wondering why the five-year rule applies to withdrawals of funds that have already been taxed. The reason is that the tax benefits of Roth and traditional IRAs are intended to promote long-term saving for retirement. Without the five-year rule, a traditional IRA owner could circumvent the penalty for early withdrawals simply by converting it to a Roth IRA, paying the tax, and immediately withdrawing it penalty-free.
Note, however, that while the five-year rule prevents this, it’s still possible to use a conversion to withdraw funds penalty-free before age 59½. For example, you could convert a traditional IRA to a Roth IRA at age 45, pay the tax, wait five years and then withdraw the converted principal penalty-free.
Generally, one who inherits a Roth IRA may withdraw the funds immediately without fear of taxes or penalties, with one exception: The five-year rule may still apply to withdrawals of earnings if the original owner of the Roth IRA hadn’t satisfied the five-year rule at the time of his or her death.
For instance, suppose you inherited a Roth IRA from your grandfather on July 1, 2021. If he made his first Roth IRA contribution on December 1, 2018, you’ll have to wait until January 1, 2023, before you can withdraw earnings tax-free.
Many people are accustomed to withdrawing retirement savings freely once they reach age 59½. But care must be taken when withdrawing funds from a Roth IRA to avoid running afoul of the five-year rule and inadvertently triggering unexpected taxes or penalties. The rule is complex — so when in doubt, consult a tax professional before making a withdrawal.
The consequences of violating the five-year rule can be costly, but fortunately, there are ordering rules that help you avoid inadvertent mistakes. Under these rules, withdrawals from a Roth IRA are presumed to come from after-tax contributions first, converted principal second, and earnings third.
So, if contributions are large enough to cover the amount you wish to withdraw, you will avoid taxes and penalties even if the five-year rule hasn’t been satisfied for converted principal or earnings. Of course, if you withdraw the entire account balance, the ordering rules won’t help you.
On October 21, 2022, the Internal Revenue Service (IRS) announced the updated contribution limits to retirement plans in Notice 2022-55. The new limits are valid beginning in tax year 2023. These limits are important, as they cap the tax benefits that can be realized from retirement plan savings contributions each year and are adjusted to account for annual inflation.
There are several options available under the ‘Employer Contribution Plans’ category. These plans are typically funded through an employer and may or may not have contributions paid for by the employer. For 401(k), 403(b), the federal government’s Thrift Savings Plan, and most 457 plans, the contribution limit will increase from $20,500 in 2022 to $22,500 in 2023.
Individuals aged 50 years and above can contribute additional funds, called ‘Catch Up Contributions.’ The catch-up contribution limit or the employer-sponsored plans mentioned above will increase from $6,500 in 2022 to $7,500 in 2023. This means those with a qualifying employer-sponsored plan who are 50 or older can contribute up to $30,000 to tax-beneficial retirement plans.
Depending on income, the IRS provides tax benefits to non-employer-sponsored retirement accounts called Individual Retirement Arrangements (IRAs). The traditional IRA offers a deduction for the income in the tax year the contribution is made, while a Roth IRA offers tax benefits when the funds are withdrawn after the qualifying retirement age.
The IRS has increased the contribution limit to these types of accounts to $6,500 in 2023 from $6,000 in 2022. For individuals eligible for a catch-up contribution, the additional contribution amount remains at $1,000.
Keep in mind that there is an income limit on both Traditional IRA and Roth IRA accounts before the tax benefits start to phase out. These limits are:
|Single Filers/Heads of Household||$73,000 to $83,000*|
|Married Filing Jointly (spouse contributing covered by employer plan)||$116,000 to $136,000*|
|Married Filing Jointly (contributor not covered by employer plan, but spouse is)||$218,000 to $228,000*|
|Married Filing Separate (contributor covered by an employer plan)||$0 to $10,000*|
|Single Filers/Heads of Household||$138,000 to $153,000*|
|Married Filing Jointly||$218,000 to $228,000*|
|Married Filing Separate||$0 to $10,000*|
Retirement Savings Contributions Credit
|Single Filers/Married Filing Separate||$36,500|
|Married Filing Jointly||$73,000|
|Heads of Household||$54,750|
*Note: Contribution limits to Traditional IRA and Roth IRA accounts phase out over the noted income range.
Need assistance understanding the tax benefits and contribution limits attached to the different tax-beneficial retirement accounts? Our team of knowledgeable professionals is here to help. Give us a call to discuss your tax strategy for retirement savings today.
Most individuals saving for retirement outside of a defined work plan use an Individual Retirement Account, better known as an IRA. These accounts come with two vastly different types, depending on what tax benefits account holders would like to take advantage of. The first, the Traditional IRA, allows the account holder to deduct contributions made during the tax year, thus lowering their adjusted gross income (AGI). The Roth IRA, on the other hand, is funded with post-tax dollars, and money can be withdrawn after retirement age completely tax-free.
Don’t fret! If the Roth IRA sounds like a better option for you, but you have money in a Traditional IRA account, you could potentially convert it to a Roth IRA. Below, you’ll discover the basics of how to convert the account and why now might be a good time to do so.
Roth IRAs offer a way for savers to put aside money for retirement using post-tax dollars. Because of this, the contributions cannot be used as a tax deduction, and withdrawals on deposits and gains are tax-free after retirement age (59 ½). Contributions to a Roth IRA begin at $6,000 and decrease the higher your income. Once a married couple reaches $214,000 in AGI, the ability to contribute directly to a Roth IRA is eliminated.
Traditional IRA accounts can be converted to Roth IRA accounts so that the money in the account can then grow tax-free. In addition to the tax-free gains, there are several other benefits of a Roth IRA, including:
The process is typically simple.
The funds are transferred directly from a Traditional IRA to a separate ROTH IRA. Tax will be due on the amount transferred; however, growth with the market recovery will now be in your non-taxable account.
In short, converting a Traditional IRA to a Roth IRA can hold several tax and wealth management benefits for account holders. Completing the process when the stock market has dipped, and income tax rates are low can decrease the tax liability on the transferred balance, making the IRA conversion more advantageous to investors.
To discuss your specific situation and whether a Roth IRA conversion is the best move for you, reach out to our team of tax professionals today!
Please note that the information provided in this article is current as of July 2022. It is intended for general informational purposes only. It is not intended to be used for the purpose of avoiding penalties under the Internal Revenue Code. Consult with your financial advisor about your specific situation.
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.
This strategy is geared toward self-employed individuals, including sole proprietors, owners of single-member limited liability companies, and other one-person businesses.
With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.
For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.
Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.
Many tax limits that affect businesses are annually indexed for inflation, and a number of them have increased for 2022. Here’s a rundown of those that may be important to you and your business.
Social Security tax
The amount of an employee’s earnings that is subject to Social Security tax is capped for 2022 at $147,000 (up from $142,800 in 2021).
In 2022 and 2021, the deduction for eligible business-related food and beverage expenses provided by a restaurant is 100% (up from 50% in 2020).
Other employee benefits
These are only some of the tax limits that may affect your business and additional rules may apply. Contact us if you have questions.
Employers offer 401(k) plans for many reasons, including to attract and retain talent. These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about participating in a plan at work, here are some of the features.
Under a 401(k) plan, you have the option of setting aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income, and defer tax on the amount until the cash (adjusted by earnings) is distributed to you. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.
Your wages or other compensation will be reduced by the amount of pre-tax contributions that you make — saving you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis (these are Roth 401(k) contributions). With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.
Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. For 2021, the maximum amount permitted is $19,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. For 2021, that additional amount is $6,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2021 is $26,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2021, $58,000, whichever is less.
Typically, you’ll be permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.
Getting money out
Another important aspect of these plans is the limitation on distributions while you’re working. First, amounts in the plan attributable to elective contributions aren’t available to you before one of the following events: retirement (or other separation from service), disability, reaching age 59½, hardship, or plan termination. And eligibility rules for a hardship withdrawal are very stringent. A hardship distribution must be necessary to satisfy an immediate and heavy financial need.
As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s 401(k) plan may allow you to receive a plan loan, which you pay back to your account, with interest. Any distribution that you do take can be rolled into another employer’s plan (if that plan permits) or to an IRA. This allows you to continue deferral of tax on the amount rolled over. Taxable distributions are generally subject to 20% federal tax withholding, if not rolled over.
Employers may opt to match contributions up to a certain amount. If your employer matches contributions, you should make sure to contribute enough to receive the full match. Otherwise, you’ll miss out on free money!
These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have.
The CARES Act includes provisions that allow individuals to take early retirement plan distributions within certain rules. These changes include provisions for people with COVID-19 or who have family members with the illness. It also includes those who experience adverse financial consequences as a result of being quarantined, laid off, furloughed or having work hours reduced because of the illness.
The recently passed CARES Act includes provisions that allow individuals to take early retirement plan distributions of up to $100,000 from their retirement accounts without being subjected to the 10% penalty and gives them three years to pay the taxes on the distribution or return the funds to their account.
Also included, is the provision allowing individuals required to take Required Minimum Distributions (RMD’s) to elect to return the funds they have taken during 2020 or to not take their RMD for the year. In order to take these early distributions, or to return RMD’s taken prior to January 31, 2020, an individual must be able to designate them as a Coronavirus-Related Distribution. To establish these items as Coronavirus-Related Distributions the individual must fall into one of the following categories:
It is important to note that these items only apply to early distributions and to RMD’s taken prior to January 31, 2020 for the current year that would therefore not fall in the normal 60-day window an individual would have to return distributions without repercussions.
If you have taken an RMD after January 31, 2020 you can simply write a check within 60 days of receiving the distribution and return those funds to your account without having to meet any of these requirements.
If you have not yet taken any RMD and do not wish to take the funds for the current year, there is nothing you will need to do to defer that payment. For any individuals that deferred their 2019 payment because they reached 70 ½ in 2019 and would have been required to take two distributions in 2020, this requirement is also eliminated.
Additionally, for those who typically use a portion of their RMD to support charitable organizations, these funds can still be withdrawn for those purposes allowing individuals to use pre-tax dollars to support the organizations that mean the most to them.
Americans share at least one dilemma when it comes to retirement planning. From the worker to the employer to the policymaker, everyone is living longer. On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, receiving almost unanimous bipartisan support, offers the most significant shift to retirement plans and opportunities since the Pension Protection Act of 2006. In the bill, there are over 25 changes and provisions that expressly aim to encourage retirement savings among all workers. This bill, along with the Senate’s Retirement Enhancement Securities Act (RESA), addresses the apparent need for a worker’s wealth to run (and finish) the race with them. These documents may face modification before being signed into law, but one thing is clear: change is coming. Below we have prepared a synopsis of the changes that present the most opportunity.
Pooled Employer Plans
Many businesses are without affiliation and are too small to offer a savings retirement plan on their own. The new bill will reduce fiduciary responsibility and lower the overall costs associated with providing 401(k) plans by expanding the option to run multi-employer plans through a plan administrator. Sec. 106 goes a step further to incentivize smaller businesses to offer a retirement savings plan. The Act introduces a $500 tax credit for automatic enrollment into their retirement plan.
The SECURE Act eases the liability concern over offering annuities. Most businesses have shied away from annuity providers because of their inherent risk. Section 204 updates safe harbor provisions, thus opening the door for employees to take advantage of converting their 401(k) balances to a pension-like payout plan. Another provision of the bill will allow workers to transfer a defunct annuity contract to an IRA while maintaining contributions. The only criticism on this update is the broad guidelines surrounding annuity providers. Some fear that ambiguity will lead to insurance companies offering shoddy plans.
Required Minimum Distribution (RMD) Age
The current law requires that most individuals begin withdrawing a minimum distribution from their retirement savings at the age of 70.5. Six-months-past-70 has invited an unnecessary amount of confusion since its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the age requirement will be raised even higher to 75.
One of the most confounding retirement rules is the age limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals the age limitation for traditional IRA contributions.
Benefit to Parents
Section 113 removes the 10 percent penalty tax from qualified early retirement plan withdrawals. Parents will be able to take an aggregate amount of $5,000 within one year of the adoption or birth of a child, penalty free. Section 302 expands section 529 plans by allowing withdrawals of as much as $10,000 for repayments of some student loans.
Currently, beneficiaries of inherited retirement plans like 401(k), traditional IRAs, and Roth IRAs can spread the distributions until their dying breath. The new revenue provisions (Section 401) changes the rules, requiring most beneficiaries to distribute the account over a 10-year period and pay any taxes due. The tax-generating change will accelerate the depletion of many inherited accounts but will not affect surviving spouses and minor children.
Another administrative improvement provided in the Act requires employers to provide a lifetime income disclosure once every 12 months. The disclosures are meant to show the amount of monthly payments the participant or beneficiary would receive based on the total accrued benefit.
Under the current law, the unearned income of children would be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie tax” measures that were added by the 2017 Tax Act. The new provision states that unearned income of children would not be taxed at trust rates. Taxpayers can retroactively elect to not pay the taxes. The bill benefits many Americans, including families of deceased active-duty service members, survivors of first responders, children who receive certain tribal payments, and college students receiving scholarships.
Other changes proposed in bill include increased penalties for failures to file and the portability of lifetime income options. The SECURE Act is as likely to pass as it is to undergo slight modifications. We will keep an eye on the state of the bill and keep you abreast of its status. In the meantime, our professionals are standing by to answer your questions and address your concerns.
The IRS recently announced the 2018 cost-of-living adjustments for various retirement plan dollar limits.
The indexed amounts, and other commonly used limits, are listed below:
|IRA Contribution Limit||$5,500||$5,500||$5,500|
|IRA Catch-Up Contributions||1,000||1,000||1,000|
IRA AGI Deduction Phase-out Starting at
|Single or Head of Household||63,000||62,000||61,000|
|SEP Minimum Compensation||600||600||600|
|SEP Maximum Contribution||55,000||54,000||53,000|
|SEP Maximum Compensation||275,000||270,000||265,000|
|SIMPLE Maximum Contributions||12,500||12,500||12,500|
401(k), 403(b), Profit-Sharing Plans, etc.
|Defined Contribution Limits||55,000||54,000||53,000|
|Defined Benefit Limits||220,000||215,000||210,000|
|457 Elective Deferrals||18,500||18,000||18,000|
|Control Employee (board member or officer)||110,000||105,000||105,000|
|Control Employee (compensation-based)||220,000||215,000||215,000|
|Taxable Wage Base||128,400||127,200||118,500|