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.
Jennifer
Answer:
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!
Chad
Answer:
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 Trust
Many 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.
Question:
I read your November 29, 2017 explanation of rollovers and the time limitations. But my issue is still unclear to me.
In December 2018, my husband made a transfer from his 401(k) to an IRA to a Roth IRA. We intended to do the same this year, but an unexpected bill hit us, and we took a distribution from the 401K two weeks ago. Taxes were taken out. The bill turned out to be much less than expected and so, we would like to roll over the distribution into his existing Roth account. Since the December one was a transfer and this one would be a 60 day rollover, is it permitted? And if so, can we do another transfer in a few months?
Thank you in advance.
Nina
Answer:
Hi Nina,
You are wise to be concerned about the timing of your transactions, but you should be OK.
The IRS has a “once-per-year rule” that limits anyone from making more than one IRA rollover in any 12-month period. (The 12-month period is not a calendar year.) Violating this rule could cause serious tax consequences.
Many of you who participate in a company retirement plan may have heard that the plan is “qualified” or “tax-qualified.” That sounds reassuring, but what exactly does it mean? In other words, what qualifies a qualified plan to be qualified? (And, while we’re at it, how much wood can a woodchuck chuck …?)
The carrot and the stick: The concept of a qualified plan resulted from Congress’s desire to incentivize companies to establish retirement plans. So, Congress enacted certain tax breaks for employers who set up those plans, but required the plans to satisfy a number of rules designed to make sure the plans don’t take advantage of rank-and-file workers. Here are the most important of those rules:
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