Retirement Archives - Pearson & Co., PC

09 Nov 2023

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VIRGINIA EMPLOYERS … RetirePath Deadline: February 15, 2024

Employer Mandates … Employee Options

What is RetirePath?

In 2020, a report by Virginia’s Legislative Information System to the General Assembly alerted lawmakers to a major employee financial shortcoming … about 45% of private-sector workers in Virginia lack access to a retirement plan through their job.

That fact prompted legislative action to propose and pass a solution, HB 2174 … a remedy referred to as RetirePath. The law went into effect July 1, 2021, and employer registration opened in 2023. Eligible employers received the first registration notification prior to July 1, 2023.

The stated goal of the bill is, “To promote greater voluntary retirement savings for private-sector workers in a convenient and portable manner.” Portability means employees may retain their plan’s value when they move to another employer.

The intent is to offer a plan to help close the retirement savings gap and improve the financial security of more Virginians. The program is designed to provide eligible employers a simple way to help their employees save for the future with a minimum of administrative burden.

RetirePath is a state sponsored, mandatory retirement plan that must be adopted by businesses that meet the eligibility criteria. The plan is administered by Virginia529, an independent agency of the Commonwealth of Virginia. Eligible employers must log on to the RetirePath Virginia website to register or seek an exemption no later than February 15, 2024.

In June of this year, RetirePath notified 8,700 Virginia businesses that may be required to participate. These emails and letters include a unique access code, registration deadline and instructions. Virginia law requires eligible employers to either register for the RetirePath plan or offer their own qualified retirement plan.

Note: The RetirePath’s site clearly states that the program “is not meant to replace or compete with employer-sponsored plans.” As an employer you may choose to establish an alternative qualified plan if that is more appropriate for your business and still remain in compliance.

In this article, we’ll detail the employer eligibility criteria. As a shortcut, you may want to click here to take the Employer Eligibility Quiz.

Employer Mandates

Employers that are eligible in 2023 are those that meet the following criteria and must register by February 15, 2024. Employers …

With 25+ eligible employees who are at least 18 years of age who work a minimum of 30 hours a week.
That has been in business 2+ years.
Without a qualified plan (such as a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b)).

Next Steps: You will need your Access Code delivered to you via email or postal service plus your employer identification number (EIN) to register or seek exemption from the program. If any of the above three requirements don’t apply to your business, you may click on “Certify My Exemption”.

If your company is eligible to participate, you will need to follow the instructions to register for RetirePath. Employer requirements are minimal. If your company is subject to the mandate, you only need to present proof of an alternative qualified plan or register by the deadline of February 15, 2024.

Then set up a payroll deduction for each eligible employee, submit payroll records each pay period and hold an annual open enrollment period.

Note: Employers that are not in compliance will incur a fine of $200 per employee per year.

RichPath Plan Structure:

Eligible employees will be automatically enrolled in the plan.
Automatic payroll deductions will contribute 5% of an employee’s after-tax pay.
Participating employees’ after-tax contributions will go directly to a Roth IRA.
Automatic deduction will increase by 1% each year until it reaches the cap of 10% of after-tax pay.
Employees may change the percentage of their contribution or opt out of the program altogether.
Employees may customize their investment or choose the plan’s default investment.
Individuals who are self-employed or don’t work for an employer registered with RetirePath can open an account today

Employer Costs: Most administration costs are handled by the Virginia College Savings board. Employers have no fees to set up their RichPath and incur no fiduciary responsibilities. Additionally, the IRS prohibits employers from making contributions to the plan.

That said, there is sure to be some internal costs of administration … adding employees, removing employees, educating employees, and uploading payroll contributions as these functions will all require administrative time.

The above presentation is meant as an overview only.
Give us a call and we’ll be happy to help you with questions.

24 Jul 2023

IRS, News, Retirement, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

EMPLOYEE RETENTION CREDIT

Pandemic-Era Tax Break … Now a Pandemic of Abuse!

At the height of the C-19 pandemic, the Employee Retention Credit (ERC) was introduced to help both business owners and workers maintain payrolls and income respectively. For those businesses that qualify, the ERC is a refundable tax credit intended for employers that continued paying employees … either while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods.

The sheer dollar amount of potential tax credits, plus the administrative burdens to expedite financial relief became an open invitation for fraudsters. In this year’s annual Dirty Dozen summary, the IRS posted the following:

Taxpayers should be aware of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC). The warning follows blatant attempts by promoters to con ineligible people to claim the credit.

The Service has published at least six warnings about ERC abuse since October 2022, including making it No. 1 on its annual “Dirty Dozen” list of the 12 top tax scams earlier this year.

Profile of Abuses

The IRS highlighted these schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Additionally, some of these advertisements exist solely to collect the taxpayer’s

personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

These promoters “present wildly misleading claims about this credit,” reported IRS Commissioner Danny Werfel. “They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”

You have seen and possibly responded to ads like the following, rampant on TV, radio, print and social media. And the call-to-action is compelling … promise of no up-front fees … just a share of the credit your company receives from the IRS.

Claim Your Business Tax Credit From the IRS!
If you own a business that had employees during the COVID-19 pandemic, contact us today to see if you qualify for up to $26,000 in tax credits per employee. This is not a loan, so there is no need to pay it back. Plus, we don’t get paid unless you are eligible and receive your credit.

What is the ERC? You Need to Be Cautious.

In this piece, we offer a summary of the ERC requirements and benefits. Additionally, we’ll share some cautionary thoughts for those of you who are contemplating or have already enlisted the services of a third-party ERC adviser.

The ERC is a refundable payroll tax credit rewarding businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021.

The credit may be as much as $5,000 per employee in 2020 and up to $7,000 per employee per quarter (for the first three quarters) in 2021. That could add up to a maximum credit of $26,000 per employee. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

Employer Eligibility: An employer is eligible for the ERC if it:

Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority or,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 or,
Qualified in the third or fourth quarters of 2021 as a recovery startup business.

Click here for more detail on each of the above eligibility requirements.

Filing Deadlines: Employers have until April 15, 2024, to file Form 941-X for the eligible quarters in 2020; and until April 15, 2025, for eligible quarters in 2021.

Note: Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.

Employers … You Need to Be Cautious! 

Third-party advisers are typically new operations put together to capitalize on the preparation of ERC applications for employers. Lack of experience along with aggressive marketing often results in improper advice regarding employer eligibility and computing the amount of credit claimed.

Employers must become aware of the risks associated with engaging third-party promoters. Here are four critical concerns to be addressed:

Often, third-party advisers do not make it clear to employers that they will need to amend their business’s federal income tax return for the corresponding period because any payroll taxes used in the computation of the credit are no longer deductible.
Receipt of the refund from the IRS does not preclude the agency from examining the employment tax return and disallowing the credit. Employers are always responsible for the accuracy of the information reported on their tax returns. Improperly claiming the ERC could result in repayment of the credit, plus penalties and interest.
Employers that have received the ERC may be an audit target given the anticipated expansion of new IRS agent hires.
In the event the IRS disallows the ERC claim, fees paid to third-party companies may not be refundable.

Employers Considering Engaging a Third-party Adviser

Here are performance criteria to help evaluate the value a prospective adviser brings to the strength of your company’s ERC qualifications, filing efforts and subsequent follow-up.

At your request, a legitimate capable adviser will:

Describe its history as tax advisers including whether the practice is exclusively devoted to ERC claims.
Detail their policy to provide audit defense plus refund fees if all or part of the ERC claim does not survive an IRS audit.
Not claim a high IRS audit success rate as the IRS audit program is so new that success claims are meaningless.
Demonstrate a solid understanding of the facts and circumstances of your business operations before the pandemic as well as during each quarter of the pandemic … with special attention to the wage limits during the first three quarters of 2021?
Prepare a written account of the specific state or local governmental orders your business was subject to and a description of the impact of each on your business operations.
Review with you any circumstances pertinent to your ERC claim where the IRS guidance regarding ERC eligibility is unclear and that the adviser’s interpretation may prompt scrutiny by the IRS.
Not present a sense of urgency for you to act by asserting the available funding for ERC claims is fast being depleted. Not so!  See above for filing claims deadlines.
Make it clear to you that qualified wages applied in ERC computations are no longer deductible on your business income tax return?

Employers Who Already Engaged a Third-party Adviser and Filed an ERC Claim 

If you now have second thoughts about the advice that led up to your ERC claim filing, your best next step is to seek counsel from an independent tax adviser to review the merits of your claim and the adequacy of your documentation.

If your independent review results in the recommendation to amend or withdraw your ERC filing (Form 941-X), you may be able to sidestep interest and penalties … along with the time, expense and stress of an IRS audit.

Alternatively, if your independent review delivers written opinion that your claim has a solid foundation based on relevant ERC tax law … at the very least you will be able to demonstrate your intent to honestly pursue support of your claim with appropriate facts.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

20 Jun 2023

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SECURE 2.0 ACT … NEW RULES FOR YOUR 401(K) OR IRA

Dozens of Provisions Intended to Improve Retirement Security

The Secure 2.0 Act was signed into law in late December 2022. The legislation builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 to further strengthen the retirement system—and Americans’ financial readiness for retirement.

Surveys conducted by the Fed report a retirement crisis for many Americans:

only 75% of non-retirees have any retirement savings whatsoever, and
only 40% feel that their retirement savings are on track.

While version 2.0 of the Secure Act introduces over 90 provisions intended to improve retirement outcomes, here are the 5 Key Takeaways.

Expanded access to retirement plans,
Raising the age for Required Minimum Distributions (RMD)
Limiting costs to withdraw funds,
Increasing retirement savings, and
Lost & found database.

Here’s a look at the major provisions of the Act as they relate to the above 5 categories.

Expanded Access to Retirement Plans

Beginning in plan years after December 31, 2024, 401(K) and 403(b) plans will be required to automatically enroll participants at the time they become eligible under the plan provisions. All current 401(K) and 403(b) plans are grandfathered. Note: Employees retain the option to not participate.

Initially the automatic enrollment amount is at minimum 3% and no more than 10%. In subsequent years, the amount increases until it reaches at least 10% but no more than 15%.

Prior to enactment of the Secure 2.0 Act, employers were required to allow part-time workers to participate in the employers’ 401(K) plan once they have attained:

One year of service with 1,000 hours, or
Three consecutive years of at least 500 hours of service each year.

The new rules reduce the three-year minimum to two years effective January 1, 2025.

Raising the Age for Required Minimum Distributions (RMD)

Under the old rules, participants were generally required to begin taking distributions from their retirement plans at age 72. Effective January 1, 2023, the new RMD rules raise the age to 73 … with a further increase to 75 on January 1, 2033.

One benefit of the change may be enjoyed by plan participants who choose to move retirement plan assets to a Roth IRA. The amount converted be taxable. That said, Roth accounts don’t require RMDs during the owner’s lifetime … plus qualified withdrawals down the road are tax-free. That is in stark contrast to traditional 401(K) and IRA plans.

Limiting Costs to Withdraw Funds

Prior to the change in rules, early distributions from tax-advantaged retirement accounts such as 401(k) plans and IRAs are subject to an additional 10% tax. Under the new provision, employees can withdraw emergency expenses from their accounts for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.”

Those emergencies may include withdrawals for:

Domestic abuse victims
Individuals with terminal illness
Qualified disasters

Plan participants are limited to one distribution of up to $1,000 per year and have the option to repay it within three years. No further emergency distributions are allowed during the three-year repayment period unless repayment has been made.

The emergency withdrawal provisions are effective after December 31, 2023.

Increasing Retirement Savings

Saver’s Match: The new rules provide for eligible low-income earners who make contributions to retirement plans to receive a nonrefundable tax credit paid in cash. The credit is equal to 50% of plan contributions, up to $2,000 per individual to be deposited in the taxpayer’s retirement plan account.

The tax credit is effective for tax years beginning after December 31, 2026, and is scheduled to phase out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers).

Higher Catch-up Limit for Ages 60-63: Employees who have attained age 50 have been permitted to make catch-up contributions up to $6,500 over and above the basic limits. Now, for tax years beginning after December 31, 2024, the catch-up limit is extended for taxpayers between 60 and 63 years old. The new limits … the greater of $10,000 or 50 percent more than the regular limit in 2025.

IRA Catch-up Limit Indexed for Inflation: The Act indexes the contribution limit for years after 2023.

Retirement Savings Lost & Found

Retirees and plan administrators sometimes lose track of each other’s contact information due to changes in name and/or address. The act mandates the creation of a retirement savings lost-and-found online searchable database to be managed by the Department of Labor. The database is to be established within two years of the date of enactment of the act. The database will allow individuals to search for plans and the contact information of the administrator of any plan in which they are or were a participant or beneficiary.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.

19 Nov 2022

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OPPORTUNITY TO ACCELERATE YOUR RETIREMENT SAVINGS

401(k) and IRA Contribution Limits Increased

Contribution limits for 401(k)s, 403(b)s, 457(b)s, IRAs, Roth IRAs, HSAs, FSAs, SIMPLE IRAs, and SEP-IRAs are all indexed to inflation. While the contribution limits don’t go up every year, you will generally see an increased contribution every year or two.

The inflation rate is now running at a 40-year high. That triggered the IRS to announce significant jumps in allowed contributions for tax year 2023. More specifically:

Taxpayers under age 50 can contribute to their 401(k), 403(b), most 457 and the federal government’s Thrift Savings Plan accounts … increases to $22,500 for 2023 … a $2,000 bump over 2022 limits.
Notably, taxpayers 50 and older win a further concession … a $3,000 boost to $30,000 annually. That number includes a $7,500 so-called catch-up contribution, up from $6,500 in 2022.

Participants in qualifying plans can reduce their 2023 tax bill by
increasing the amount they contribute pre-tax to retirement accounts.

Here’s a summary of the key provisions of the changes for 2023.

401(k) Plans – Annual Contribution Limits

Employees under age 50 – $22,500, up $2,000 from 2022.
Employees 50 and older – $30,000 (Includes $7,500 catch-up contribution, up from $6,500)
If the Plan permits, additional after-tax employee contributions may be made to top-out the total employer/employee contribution limits – employees under age 50, $66,000; 50 and older, $73,500.

IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $1,000 catch-up contribution.

Note: You can’t make a tax-deductible contribution to an IRA unless you have no workplace retirement plan, or your income is below certain limits. For 2023, the deduction will phase out for single taxpayers earning between $73,000 and $83,000 (up from $68,000 to $78,000) … and for married couples filing jointly earning $116,000 to $136,000 (up from $109,000 and $129,000 respectively).

If your spouse is covered by a workplace plan and you’re not, your deduction for an IRA phases out between $218,000 and $228,000 in 2023, up from $204,000 to $214,000 in 2022.

Roth IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $3,000 catch-up contribution.

Note: The income phase-out for contributions to a Roth IRA for singles and heads of household will be $138,000 to $153,000 respectively in 2023, up from $129,000 to $144,000. For married couples filing jointly, the phase-out range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.

Simple IRA Accounts – Annual Contribution Limits

Increased to $15,500, up from $14,000
If the Plan permits, employee participants 50 and older can make an additional $3,500 catch-up contribution, up from $3,000 in 2022.
Employee participation in other employer plans is limited to a combined annual contribution of $22,500.

Saver’s Credit

Low and moderate-income workers may add to their retirement fund value via federal tax credits that deliver a 100% reduction in the taxpayer’s tax-bill. Eligible workers may enjoy a tax credit in a range of 10% to 50% of contributions made to an IRA or employer sponsored retirement plan.

Note: The credit gradually reduces and phases out as a taxpayer’s income rises. In 2023, the credit will phase out at $73,000 for married couples filing joint tax returns (up from $68,000); $36,500 for singles and couples filing separately (up from $34,000); and $54,750 for heads of household (up from $51,000).

SEP IRAs – Annual Contribution Limits
(Self-employed & Small Business Owners)

Increased to $66,000 from 2022 limit of $61,000
Self-employed persons may contribute up to 20% of earnings up to $330,000, up from $305,000.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

23 Jan 2022

Estate Planning, IRS, Retirement Pearson & Co, PC 0 comment

REQUIRED MINIMUM DISTRIBUTIONS FOR 2022

REQUIRED MINIMUM DISTRIBUTIONS FOR 2022
Important Reminders for Retirees

Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are a fact of life for those of us with an Individual Retirement Account (IRA) or participate in a 401K plan … here referred to as retirement accounts.

The SECURE Act signed into law December 2019, includes a significant change to the mandatory RMD age requirement. The RMD age has been advanced to age 72 from the previous limit of 70½. This revision reflects that Americans are living and working longer. Notably, since the original law was enacted, life expectancy has increased more than 2 percent (1.6 years) for all Americans and more than 8 percent for those over age 65.

So, beginning January 1, 2020, money from the above retirement accounts must start flowing to you in specific, minimum amounts no later than April 1, following the year you reach age 72. Other than Roth IRAs, RMD withdrawals apply to all other individual retirement accounts … IRA, Simple IRA or SEP IRA as well as 401K plans.

Note: Roth IRAs are not subject to mandatory withdrawals until after the death of the owner.

The RMD changes prove to be a boon to most taxpayers who can afford to delay taking money out.

The distribution amount will change from year to year based on accepted IRS tables that model anticipated life expectancy. Since life expectancy estimates diminish with age, annual RMD will vary as well. It is calculated by dividing an account’s year-end value by the distribution period determined by the IRS.

The table shown below is the Uniform Lifetime Table, the most commonly used of three life-expectancy charts that help retirement account holders figure mandatory distributions. The other tables are for beneficiaries of retirement funds and account holders who have much younger spouses.

Required Minimum Distribution Table 2022

Let’s take a look at how the revised RMD age limit affects a taxpayer with a retirement account valued at $100,000. Under the old rules, that person would be required to take a minimum IRA withdrawal of $3,650 at age 70½. Divide the value of the retirement account by the distribution period to determine the RMD … $100,000 divided by 27.4 = $3,650.

So, in keeping with the above calculations, assume our retiree is age 72 with a retirement account valued at $100,000. Note the corresponding distribution period (25.6). Divide the value of the retirement account by the distribution period to determine the RMD … $100,000 divided by 25.6 = $3,906.

Delaying receipt of the RMD until age 72 reduced the taxpayer’s expected lifetime taxable income by over $7,000 … $3,650 – 3,906 = $256 X 27.4.

Note: Make sure you do this for all traditional IRAs or 401 K accounts you have in your name. Once you add up all of the RMDs for each of your accounts, you can withdraw that total amount from one or more of your retirement accounts. You don’t have to take your RMD from each account as long as the total you withdraw satisfies your RMD responsibility. Consider withdrawing from smaller balance accounts and close them out to simplify and consolidate your retirement accounts

Why is a Minimum Distribution Required?

The good news is that you enjoyed years of tax deductions and (hopefully) tax deferred growth in your retirement account. So, it’s your money … why can’t you decide how much and when to take it out … or just leave it sit? The answer is the tax-man will get his due.

You paid no taxes on your deductible retirement plan contributions. And you paid no taxes on any incremental growth on your investments during the years accumulating your nest egg. Therefore, the IRS wants its just due when you withdraw funds in your retirement. That said, chances are your post-retirement tax bracket is lower than during your prime earning years, so you’ll likely keep more money than if you had not initiated your retirement account.

Similarly, if you were permitted to leave all your money in your retirement account, it would eventually become eligible to be passed on as inheritance and not trigger a taxable event. Your RMD compels you to take out at least a minimum amount which is added to your gross income and potentially subject to tax.

3 Frequently Asked Questions

There are three questions that are commonly asked and may be on your mind as well. It’s likely you will have others that we’d like to help you with … just give us a call or drop an email … we’ll respond promptly.

Do you need to take your entire RMD all at one time?
No. Frequency of withdrawals is not an issue. The important thing is that, in the aggregate, all your withdrawals add up to your RMD in the year required.

Should you appoint a named beneficiary for each of your retirement accounts?
Yes. By so doing you will avoid your account balance(s) being included in your estate in the event of your death.

Are there consequences if I don’t withdraw my RMD as required?
Yes. You may be subject to a 50 percent excise tax on the amount not distributed.

Other Considerations

The foregoing is not meant as a comprehensive recount of the RMD requirements. There are other considerations that may apply in your specific circumstances. Some issues may include:

Inherited retirement accounts and RMD after account owner dies
RMD based on Joint Life & Last Survivor Expectancy Table if your spouse is more than 10 years younger than you and is sole beneficiary

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co will help. Give us a call or drop an email. We’ll respond immediately.

23 Jan 2022

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RETIREMENT PLAN CONTRIBUTION LIMITS RAISED

RETIREMENT PLAN CONTRIBUTION LIMITS RAISED
IRS Announces Increases for 2022

Retirement Plan Contributions Limit Raised

Good news for participants in 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan. If you participate in one or more of these plans, your tax year 2022 contribution limits will increase by an additional $1,000 … making annual deductible contributions capped at $20,500.

Limits on contributions to traditional and Roth IRAs remains unchanged at $6,000.

Note: There are conditions that must be met for contributions to traditional IRAs to be tax deductible.

If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated. The amount of the deduction depends on the taxpayer’s filing status and their income.

Traditional IRA income phase-out ranges for 2022 are:

$68,000 to $78,000 – Single taxpayers covered by a workplace retirement plan
$109,000 to $129,000 – Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan.
$204,000 to $214,000 – A taxpayer not covered by a workplace retirement plan married to someone who’s covered.
$0 to $10,000 – Married filing a separate return. This applies to taxpayers covered by a workplace retirement plan

Similarly, there are phase-out ranges of income in 2022 for Roth IRAs and Saver’s Credit participants.

Roth IRA contributions income phase-out ranges for 2022 are:

$129,000 to $144,000 – Single taxpayers and heads of household
$204,000 to $214,000 – Married, filing jointly
$0 to $10,000 – Married, filing separately

Saver’s Credit income phase-out ranges for 2022 are:

$41,000 to $68,000 – Married, filing jointly.
$30,750 to $51,000 – Head of household.
$20,500 to $34,000 – Singles and married individuals filing separately.

The agency also announced the possibility of cost‑of‑living adjustments that may affect pension plan and other retirement-related savings. No details have been released as of this writing.

Have Immediate Questions or Concerns?
Pearson & Co stands ready to help as needed.
A phone call or email is all it takes.

29 Jul 2020

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SENIORS & RETIREES … ANOTHER FINANCIAL BREAK

SENIORS & RETIREES … ANOTHER FINANCIAL BREAK
No Need to Deplete Your Retirement Fund in 2020
And If You Have … At Your Option, Return Distributions to Your Account

Financial Break Earlier this year, we reported that President Trump signed the SECURE Act into law raising the Required Minimum Distribution (RMD) age to 72 from 70½ . That proved to be a boon for taxpayers who can afford to delay IRA withdrawals. Delaying receipt of the RMD until age 72 significantly reduced taxable income for many taxpayers. Be sure to click here for the details

More Financial Relief for Seniors & Retirees

Now there is further financial relief triggered by The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Act provides for RMDs to be waived during 2020 for IRAs and retirement plans. That expansion of benefits includes beneficiaries with inherited accounts.

Participants in virtually all defined contribution retirement plans qualify, i.e.:

traditional IRAs
SEP IRAs
SIMPLE IRAs
401(k) plans
403(b) plans
457(b) plans
profit sharing plans.

Note: The RMD suspension does not apply to qualified defined benefit plans.

Already Took Your RMD for 2020 … Good News!

At your option, you may return the distribution to your qualifying plan. Additionally, the suspension of the RMD rule for this year means your distribution is likely eligible for rollover to another IRA/qualified retirement plan as well as return to the original plan. The key is to repay the distribution to the distributing plan no later than Aug. 31, 2020, to avoid paying taxes on that distribution.

How Else May Seniors Benefit?

Why does skipping your RMD in 2020 matter? Like most people, you funded your IRAs and 401(k)s with tax-deferred dollars. Particularly if you are among the many Americans struggling in 2020 because of the pandemic, having more flexibility on distributions can be a financial bonus.

Additionally, both the equity and fixed income markets have been extremely volatile. You may win by giving your retirement portfolios another year to recover.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help.

Give us a call or drop an email. We’ll respond immediately.

26 Mar 2020

2020 Required Minimum Distributions-Featured

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SECURE ACT BUMPS RMD AGE TO 72!

SECURE ACT BUMPS RMD AGE TO 72!
A Boon for Taxpayers Who Can Afford to Delay IRA Withdrawals

2020 Required Minimum Distributions-Featured Required Minimum Distributions (RMDs) are mandatory for Americans who are participants in Individual Retirement Accounts (IRAs) or participate in a 401K plan. In this article we’ll lump all under the heading of retirement accounts.

Since inception of the above plans, RMDs were the rule beginning at age 70½. With a stroke of his pen, President Trump signed the SECURE Act into law raising the RMD age to 72. This revision reflects that Americans are living and working longer. Notably, since the original law was enacted, life expectancy has increased more than 2 percent (1.6 years) for all Americans and more than 8 percent for those over age 65.

So, that means beginning January 1, 2020, money from the above retirement accounts must start flowing to you in specific, minimum amounts no later than April 1 following the year you reach age 72. Other than Roth IRAs, RMD withdrawals apply to all other individual retirement accounts … IRA, Simple IRA or SEP IRA as well as 401K plans.

Note: Roth IRAs are not subject to mandatory withdrawals until after the death of the owner.

Estimates are that only about 20 percent of retirees take no more than the minimum RMD. So, the change to the rules will have little effect on the remaining 80 percent who withdraw more than the IRS requires.

The RMD changes are a boon to most taxpayers who can afford to delay taking money out.

Here’s an example of the tax-saving difference the new RMD limit may deliver to a taxpayer who will be 70½ this year and having a retirement account valued at $100,000. Under the old rules, that person would be required to take a minimum IRA withdrawal of $3,650 in tax year 2020. In contrast, under the SECURE Act, the RMD will be $3,906 at age 72.

Delaying receipt of the RMD until age 72 reduces the taxpayer’s taxable income by $7,300.

The distribution amount will change from year to year based on accepted IRS tables that model anticipated life expectancy. Since life expectancy estimates diminish with age, annual RMD will vary as well. The exact distribution amount changes from year to year. It is calculated by dividing an account’s year-end value by the distribution period determined by the IRS.

So, in keeping with the above calculations, assume our retiree is age 72 with a retirement account valued at $100,000. To calculate the year’s RMD amount, look at the age of the retiree on Dec. 31 (72) and note the corresponding distribution period (25.6). Divide the value of the retirement account by the distribution period to determine the RMD for that tax year … $100,000 divided by 25.6 = $3,906.