A solo 401(k) plan is a great retirement savings vehicle for self-employed business owners with no employees (other than their spouse). But if you’re considering a new solo 401(k), be aware that there’s a December 31, 2022 deadline to open up the plan if you want to make 2022 elective deferrals.
A recent federal court case from West Virginia illustrates that the spouse of a 401(k) participant usually has no right to prevent the plan from paying the participant a lump sum distribution.
In Gifford v. Burton, a Mr. Gifford (his first name is omitted in the decision) was an optician at Walmart and a participant in the Walmart 401(k) plan. He was married to Sara Gifford, who was his sole beneficiary under the plan. In February 2021, Mr. Gifford received a distribution of all of his 401(k) funds and deposited those funds into an IRA. He then designated his daughter, Emma Gifford, as 90% beneficiary of his IRA and wife Sara as 10% beneficiary.
Here’s a common question: An employee retires in or after the year he turns 72 and wants to roll over his 401(k) funds to an IRA. Does an RMD have to be taken before the funds are rolled over?
Question:
When converting an IRA to a Roth IRA, do the investments (stocks, bonds, ETFs, etc.) have to be sold or can they be transferred directly from the IRA into the new Roth account?
Question:
Someone participates in a 401(k) through his regular employer and has a solo 401(k) for a side job (self-employed). That person maxed out his 401(k) pre-tax deferrals for 2021 through the regular 401(k) and utilized the remaining limit up to $58,000 for a Mega Backdoor Roth contribution via after-tax contributions. Is he eligible for any solo 401(k) contributions for 2021 (not catch-up eligible)? What am I missing here?
Those of you who participate in 401(k) plans or certain 403(b) plans should see something new on your next quarterly statement for the period ending June 30, 2022.
For the first time, the statements must include illustrations of the monthly payments you would receive if your current plan account balance was used to purchase an annuity. This new requirement is part of the SECURE Act passed by Congress in December 2019. Congress intended that employees will see the illustrations and realize that their lump sum account balance may not produce high enough monthly income to last their lifetime. This, in turn, will persuade workers to increase their retirement plan savings rate.
SCENARIO: John owns multiple Roth IRAs. He believes it is necessary to maintain all these accounts to keep things properly organized and to track his 5-year conversion clocks. He has contributed to Roth IRA #1 for over a decade. He did a partial Roth conversion from a traditional IRA many years ago (to Roth IRA #2).
Usually, rollovers involving 401(k) accounts and IRAs involve moving dollars from a plan to an IRA. But sometimes it makes sense to instead do a “reverse rollover” – from an IRA to a 401(k).
Let’s get some bad news out of the way: Although 401(k)s (and other company plans) are required to allow rollovers out of the plan, they are not required to allow rollovers into the plan. So, before withdrawing your IRA, check with your plan administrator or HR to make sure you can do a reverse rollover. Also, the tax code only allows reverse rollovers of pre-tax (deductible) IRA funds. Roth IRA funds and after-tax (non-deductible) IRA accounts are not eligible.
Some of the proposed SECURE Act regulations, released in February, are convoluted and unnecessary. We have made our opinions known. Fortunately, many of the confounding new rules – several of which we have written about – will be limited in their impact. However, a new discovery could affect a larger percentage of IRA and 401(k) beneficiaries. The combination of a few basic principles may lead to inherited IRA confusion. Does order + order = chaos?
Example: Joe, age 75, has a traditional IRA (“IRA X”). Joe dies and leaves the IRA to his daughter Lucy. Lucy does NOT qualify to stretch payments as an eligible designated beneficiary (EDB) over her lifetime, so she must apply the 10-year rule. The entire IRA must be emptied by the end of the tenth year after the year of death. Additionally, Joe died after his required beginning date (“RBD” – April 1 of the year after he turned 72), so Lucy must also take required minimum distributions (RMDs) in years 1 – 9 of the 10 years.
Employees leaving their jobs are often surprised to discover they aren’t entitled to the full balance of their company plan account. The reason is that some plans impose a vesting rule on certain types of contributions.
What do the vesting rules mean? They tell you how much of your plan benefit you actually own and cannot be taken away from you. If you’re fully vested, you’re entitled to your entire benefit. If partially vested, you only get a portion of your benefit.
