Question:Hello, I have heard Ed speak at several different Wells Fargo events and he spoke one time about clients who over contribute to their 401(k). I believe there was a strategy where they can move the excess to an IRA. Can you tell me where to find more info on this strategy?Answer:There is no strategy to move an excess 401(k) contribution to an IRA. To avoid being taxed twice, excess plus earnings attributable must be removed by April 15th of the year after the year the excess was contributed. There is no way to “fix” it with a rollover or some other transfer as the excess is ineligible to be rolled over. The combined allowable amount contributed to a 401(k) by employer and employee is $56,000 in 2019 ($62,000 over age 50), and that cap cannot be breached.
Just as IRA and 401(k) plans have different levels of bankruptcy protection, so too do other possessions. Whether these assets are qualified or not, there are ways to shield oneself from creditors. Case in point - in order to shelter certain monies, a couple in Wisconsin sold their 1974 Plymouth and some real estate. They subsequently purchased a non-qualified annuity with the proceeds. Their creditors did everything in their power to disqualify the annuity to gain access to the funds, but were unsuccessful. The Court ruled that the couple had successfully used “exemption planning” to remove the assets from their bankruptcy estate.
The Setting Every Community Up For Retirement Enhancement (SECURE) Act recently passed the House of Representatives by a large margin. It is currently stalled in the Senate. This bill includes a multitude of provisions that would reshape retirement savings if passed. Buried deep within the proposed legislation is a provision that would do away with the stretch IRA for most beneficiaries. We have received many questions on this provision. Here are a few of the most common:
Question:As I understand it, a contribution would be income tax free when sent directly from an IRA to a 501(c)(3) organization. It is not clear to me if the distributions still will affect my MAGI that in turn will affect Medicare Part B IRMAA premiums.JenniferAnswer:Hi Jennifer,If your IRA distribution satisfies the conditions for a qualified charitable distribution (“QCD”), the distribution will not be taxable to you. That, by itself, won’t lower your modified adjusted gross income (“MAGI”). However, if the QCD is used to satisfy the required minimum distribution (“RMD”) from your IRA, that will reduce your MAGI.
Participating in a company plan, like a 401(k) or 403(b) plan, is a great way to save for retirement. But to make sure that employees don’t use those plans as checking accounts, Congress has imposed limits on when you can withdraw your funds. Generally, you can’t receive a distribution until severance from employment, disability or death. Most plans also allow payouts after age 59 ½ - even if you’re still working – and allow you to borrow against part of your account while still employed.Beyond that, your plan may (but isn’t required to) let you pull out your funds to take care of a financial hardship. Here’s a quick summary of how hardship withdrawals work:
Question:Hi Ed,I have heard conflicting reports. Would the proposed SECURE Act affect Roth IRAs? Or, is the elimination of the stretch on for Traditional IRAs?Many thanks!ChadAnswer:Hi Chad,There does seem to be a lot of confusion out there on this issue. Yes, the SECURE Act, if passed, would affect inherited Roth IRAs as well as inherited Traditional IRAs. The stretch would be eliminated for most beneficiaries and replaced with a 10 year rule. Remember, this is only proposed and still has yet to be passed into law.
You may wonder about naming your trust as your IRA beneficiary. For some that may be the way to go, but you should be careful. Trusts are not for everyone. There are trade-offs and consequences. Trusts as IRA beneficiaries create unique problems and tax complications.Naming a TrustMany IRA owners will name a living person as beneficiary of their IRA. Often that person is a spouse or child. You could simply name that person on the IRA beneficiary designation form. If you want to name your trust instead of naming a person as a beneficiary on your IRA, you would name your trust on the beneficiary designation form.
Sometimes it pays to go solo.For self-employed individuals looking to maximize their nest egg, a solo 401(k) plan -- also known as an “individual 401(k)” or a “uni-k” -- may be a better choice than a SIMPLE or SEP IRA.Who Can Have a Solo 401(k)? Business owners can open up a solo 401(k) as long as they have no employees (other than a spouse). Solo plans are typically used by sole proprietors, but they are also available to owners of an incorporated business. If you’re self-employed and also earn salary as a regular employee of another business, you can still have a solo 401(k). But only your self-employment income can be taken into account in the solo plan.
By the look of everyone’s Facebook and Instagram photos, it appears we are all flying Gulfstream jets around the world, relaxing on far-away beaches and lighting Cuban cigars with twisted-up $100-dollar bills. Is the economy really doing that well for everyone? Are we all participating in these boom times? Of course not. Living paycheck to paycheck is commonplace. In fact, many people try to access whatever retirement nest egg they do have to cover expenses and emergencies happening right now. Foreclosure notices are issued. Student loans pile up. A child gets sick and health coverage only goes so far. Emergency funds are required immediately.
It is not unusual for many workers today to have a side gig. They may have job, and it might even be full time, but it’s still not enough to make ends meet. So, they operate their own business on the side. The extra income can be welcome. It can also be an overlooked source for retirement savings. A Simplified Employee Pension (SEP) IRA plan can offer an easy and inexpensive way to fund your retirement with income from your side gig.A SEP IRA plan is an employer sponsored retirement plan where contributions are made to employee’s IRAs.The process for establishing and operating a SEP is very straight forward. Contributions, which are tax-deductible for you or your business, go into an IRA that you establish. For SEP purposes if you are self-employed, you are considered an employer.
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