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Tax Considerations for the Retiree – Qualified Plan Issues

Now that you’ve worked through your family and filing issues, as well as your investment income and other issues, it’s time to take a look at the last category for tax time consideration: qualified plan issues.

Qualified plans often play a large part in the retirees income equation, so it’s essential to properly account for distributions taken throughout the year. Additionally, each account type carries slightly different rules, so you want to stay on top of when you can begin distributions from one account or what your distribution requirements are for another.

This article is third in a series on Tax Considerations for the Retiree. Read of the series here:

  1. Tax Considerations for the Retiree – Family and Filing Issues
  2. Tax Considerations for the Retiree – Investment Income and Other Issues
  3. Tax Considerations for the Retiree – Qualified Plan Issues

 

Here are some questions to ask as you approach your qualified plan issues this season.

Are You Above Age 70 ½:

  • With an Inherited IRA?

    Ensure that your RMD has been met and reported (Form 1040, Lines 4a and 4b).
  • And Have Completed a Qualified Charitable Distribution?

    Double check that this amount if properly accounted for and that the amount is excluded on Form 1040, Line 4b.

 

Did you Fail to Take the Required Minimum Distribution?

Your Required Minimum Distribution is the minimum amount of money that you should withdraw from your retirement account(s). If you failed to take the RMD, you will need to pay a penalty, which can be calculated on Form 5329 and carried over to Schedule 4, Line 59.

Have You Made a Non-Deductible IRA Contribution?

Look at Form 8606 for more information about your non-deductible IRA contribution. Then, ensure that the cost basis for this contribution is properly tracked.

Have You Taken a Non-Qualified Distribution from a 529 Account?

If you took a non-qualified distribution from a 529 account, you’ll need to pay the penalty on the withdrawal amount. File form 5329 to account for the penalty and then carry it over to Schedule 4, Line 59. Your tax professional can provide personalized guidance if you want to understand more about whether your 529 distribution(s) is qualified.

Did You Withdraw from a Non-Deductible IRA?

You can use Form 8606 to ensure that the taxable and non-taxable portions of your distribution were calculated correctly.

Did You Convert Funds from a Traditional IRA to a Roth IRA?

Conversion of funds from a traditional IRA to Roth IRA can impact your bottom line at tax time. Use Form 8606 to report the converted amount and to ensure that non-deductible IRA contributions were converted and treated as non-taxable. If you made any conversions of this type, you’ll want to enlist your tax professional in assisting you to calculate this properly.

Have You Rolled Retirement Funds from One Account Type to Another?

Similarly, if you’ve converted retirement funds from one account type to another (ex. Moving funds from a 401(k) to an IRA), you want to ensure that this is reported and calculated properly. Ensure that funds are treated as a rollover and not as a distribution by double checking that Form 1040, Line 4a displays the rollover amount. Meanwhile, Form 1040, Line 4b should show $0.

Did You Rollover Retirement Funds and Utilize NUA?

If yes, you will need to review Form 1040, Lines 4a and 4b to see that your IRA distributions are recorded and to ensure that the basis was taxed.

These are only some of the considerations that you need to make as you review your 2018 tax return and prepare for the upcoming tax season. To learn more about tax considerations for the retiree, see our posts on family and filings issues, as well as what to do about investment income.

This article is third in a series on Tax Considerations for the Retiree. Read of the series here:

  1. Tax Considerations for the Retiree – Family and Filing Issues
  2. Tax Considerations for the Retiree – Investment Income and Other Issues
  3. Tax Considerations for the Retiree – Qualified Plan Issues

 

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

6 Ways that the SECURE Act Might Impact Your Retirement Planning

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is a major federal retirement reform measure. This bill puts forth a series of revisions to previous laws governing taxes on retirement income, collection ages, and more.

While it’s not law yet, there is a lot of talk about how the SECURE Act impacts retirement planning for the average American. Investors want to know how this is going to make a difference to their portfolios, present and future. After all, there are a lot of ways in which new regulations can change existing plans for better or worse.

There are dozens of measures included in the SECURE Act, some more significant than others. Here are the ones that are most likely to make a difference to your retirement planning activities or existing portfolio.

1. Provides More Opportunities for Small Businesses to Offer Retirement Plans

Under the SECURE Act, there are more opportunities than ever for small businesses to opt into retirement planning for their employees. This bill has provisions to extend previously unreachable 401(k) sharing options for small businesses by allowing multiple small businesses to work together as a larger group and pool contributions into bigger funds. This would, in effect, give employees of small businesses retirement planning options on par with what they would see if they worked for a larger employer, provided that the owner(s) of the small business join a 401(k) pool.

Until now, small businesses have been limited in their ability to provide a variety of retirement planning options for employees, which can impact a small business’s ability to attract and retain talented employees. Options like SIMPLE IRA and SEP IRA, while adequate, don’t have the same luster as 401(k) options. As a result, many small businesses simply don’t offer retirement plans for their employees. Opening 401(k) options for small businesses can provide value for small business owners and confidence for employees at these companies.

2. Removes Age Limitations for IRA Contributions

Another impact that the SECURE Act would have is the removal of age limitations for IRA contributions. Currently, there is an age limit on IRA contribution that limits individuals over age 70.5 from contributing to IRAs. This seemingly discourages retirement savings for individuals who are approaching or past the traditional retirement age.

Removing the age limitation for IRA contributions will encourage continued IRA contribution, even into one’s 70s and beyond. Interestingly, there is already no age limit for contributions to Roth IRA accounts, so this would bring more balance for investors on the fence about IRA conversion.

3. Add Opportunities for Annuities within Retirement Plans

Provisions in the SECURE Act would provide the opportunity for 401(k) plan providers to add annuities to the 401(k) mix, further diversifying investment options for those who invest in these plans. Until now, there has been hesitation on the part of providers to add annuity options, since annuities have presented a certain level of liability when packaged as part of a 401(k) plan. However, the SECURE Act provisions remove this liability from the provider’s side, which may open more options to add annuities to the 401(k) mix.

4. Extends the Required Minimum Distribution Age

By law, you’re required to take a required minimum distribution (RMD) from certain retirement accounts by the time you reach age 70.5. Some investors don’t appreciate the constriction of this requirement, especially if they’re still working at age 70.5 or don’t plan to fully rely on their retirement savings until a later date.

Under the SECURE Act, investors will see the RMD age moved from age 70.5 to age 72. This provides a cushion for investors to add a final push of savings to their retirement accounts. Of course, if you plan on drawing from those accounts earlier than age 72, you’ll still have the option to do so.

5. Provides Penalty-Free Distribution for Certain Withdrawals

Generally, investors shy away from taking pre-retirement withdrawals from their retirement accounts because of the rate at which those withdrawals are taxed. But in some life circumstances, the future nest egg is a valuable tool that could provide some much needed relief in the short-term.

The SECURE Act, in part, seeks to answer the challenge of accessing retirement funds for certain life changes by removing the penalties associated with these withdrawals. Most notably, the SECURE Act has a provision that allows investors to take qualified withdrawals for the birth or adoption of a child. It opens up to $5,000 in penalty-free withdrawals for a qualified birth or adoption within one year of the child’s birth- or adoption-date.

6. Removes Certain Qualifications from Inherited Accounts

Inherited retirement accounts (401(k)s, IRAs, Roth IRAs) have, in the past, provided beneficiaries with the ability to withdraw funds over the course of their lifetimes. However, under provisions in the SECURE Act, these distributions would be limited to a ten year period.

While this doesn’t necessarily make a big impact for smaller inherited accounts, like 401(k)s, since they’re typically liquidated within a short period of time, it does make a difference for investors collecting so-called “stretch” benefits from inherited IRAs. In a technical sense, IRAs are not strictly retirement accounts. The rationale of the SECURE Act’s limitations is to reduce the length of time that beneficiaries can receive penalty-free inherited IRA distributions and infuse a certain amount of tax money back into the economy, by bringing back penalties for distributions taken outside of the designated decade.

So, How Might the SECURE Act Impact Your Retirement Planning

As an investor, you want the confidence that your investments are working hard for you and will one day, hopefully, help you to reach your future financial goals. With a big piece of legislation, such as the SECURE Act, on the table, there are ways in which today’s planning may not be sufficient for reaching tomorrow’s goals.

Instead of trying to work through this on your own, look to your financial advisor for information about how retirement reform might impact your bottom line. Your advisor can help you to sift through new requirements, evaluate your current accounts, and make adjustments that align you with the track you want to take.

If you have any questions about the SECURE Act or want to learn more about your retirement planning options, contact Puckett & Sturgill Financial Group today for a consultation!

Can I Do A Qualified Charitable Distribution from My IRA?

If you’re looking for ways to use your IRA funds, you may consider a Qualified Charitable Distribution (QCD) as a way to meet your required minimum distribution (RMD).

Outside of the good feeling that comes from contributing to a worthy cause, one of the main benefits of a QCD is that it allows you to exclude the amount donated from your taxable income. Additionally, this amount doesn’t require itemization, which can bring a bit of relief to your overall numbers come tax time.

Of course, not all IRAs and investors qualify for QCD contributions. Read on to learn whether your situation is ideal for a QMD.

Qualifying IRAs

In order to make a charitable distribution with your IRA funds, your IRA needs to fall into one of the following categories:

  • Traditional IRA
  • Inherited IRA, including inherited Roth IRA
  • SEP IRA
  • SIMPLE IRA

Additionally, you need to be above the age 70.5 at the time that you plan to make a charitable distribution and, in the case of SEP or SIMPLE IRAs, must be no longer receiving employer contributions in order to qualify.

Giving Limits

While giving away your funds in the form of QCDs is a strategic way to meet your RMD, enjoy accompanying tax benefits, and benefit from giving to charity you cannot exceed a certain giving threshold. For couples, the QCD cannot exceed $200,000; for singles, the QCD must remain under $100,000.

Qualifying Charities

Charitable distributions are intended to be just that: charitable.

In order to verify the eligibility of a recipient organization, your QCD recipient must not be a private foundation or donor-advised fund. In general, most 501(c)(3) organizations qualify to receive QCDs. If you have a question about a particular charity, consult a financial professional to learn whether it qualifies for your donation.

Working Through the QCD Process

Once you’ve got an approved charity and know that your IRA funds are eligible for distribution, you’ll begin the QCD process to release the funds to the charity of your choice. Here’s how the process works:

Step One: Coordinate with Your RMD

You will want to distribute funds to a charity through QCD during the same year as your RMD. Ensure that you establish the proper timing for this distribution to coincide with your RMD in order to avoid penalties for missing your applicable deadlines or withdrawal requirements.

Step Two: Communicate with Your IRA Custodian

Your IRA custodian can help you to put your QCD plan into action, but there is some information that you need to communicate to get the process started. You need to submit your request in writing and need to specify the dollar amount you’d like set aside for QCD. Additionally, you should request this check be made payable to your charity of choice but mailed to you.

Step Three: Send the Funds to Your Chosen Charity

Once you receive the check, you can then forward it to the charity you’ve chosen. When you send the check, be sure to request a receipt so that you can update your tax records accordingly.

Step Four: Keep Your Tax Info Straight

When you file taxes for the year of your QCD, you will need to report the donation on your 1040 form. You can enter the donation amount on line 15a and put $0 for line 15b. Take care to note QCD.

Planning for Retirement

Whether you’re setting up an IRA or want to learn more about your options for taking your RMD, a financial advisor can offer personalized support for working through your retirement strategy. Contact Certified Financial Planner Jacob Sturgill to learn about how retirement planning can help you make the most of your future.

Important Disclosures:
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.