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As part of the CARES Act, the requirement for older taxpayers to take required minimum distributions from their retirement plans was waived for 2020. This primarily was due to the anticipated drop in value for most investments as a result of the economic effects of the COVID-19 pandemic, which did not end up materializing. So, barring any extension of the 2020 moratorium by Congress, required minimum IRA distributions must resume for the 2021 tax year.
Required minimum Distributions (RMDs) are required distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to keep funds indefinitely in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the amount that is not distributed but should have been.
If you turned age 70½ before 2020 or turned 72 in 2020, you are already subject to the RMD requirement and must take a distribution in 2021. If you turn 72 in 2021, you must begin taking RMDs in 2021. However, the first year’s distribution for 2021 can be delayed to no later than April 1, 2022. The downside to this means you would have to take two distributions in 2022, which may or may not be beneficial to your taxes.
The amount you are required to withdraw is based upon the value of your IRA account on December 31 of the prior year divided by the “distribution period” (your life expectancy), which generally is found in the Uniform Lifetime Table for the year of distribution. Historically, the Uniform Lifetime Table – created by the IRS – has remained unchanged. But beginning with distributions in 2022, the IRS has developed a new table that reflects a longer life expectancy. In addition to the Uniform Lifetime Table, there is a Joint and Last Survivor Table, which can be used when the spouse is the sole beneficiary and is more than 10 years younger than the IRA account owner (this will result in a smaller RMD).
If you have more than one IRA, the RMD for each one is figured separately, but you may add up all of the RMDs and take the total amount required for the year from any one or a combination of your IRAs.
There is no maximum limit on distributions from a traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.
Because traditional IRA contributions are tax-deductible, distributions from these IRAs generally will be fully taxable. However, in some circumstances, the taxpayer may have basis from nondeductible contributions. In these situations, a portion of each year’s IRA distributions will be nontaxable.
Another method to reduce your tax resulting from RMDs is to donate the RMD directly to charity. A taxpayer may donate up to $100,000 of his or her IRA funds to a charity by directly transferring the IRA funds via a trustee-to-charity transfer. In doing so, (1) the transfer counts toward the RMD requirement, (2) the amount transferred is not taxed as income, and (3) no charity deduction is claimed. An advantage of this provision is that a taxpayer can take the standard deduction and still benefit from the charitable donation. It also prevents the IRA distribution from being included in the taxpayer’s AGI; meaning it would not affect certain tax items such as the taxability of Social Security income and the cost of Medicare premiums.
Even though an IRA owner whose total income is less than the return-filing threshold is not required to file a tax return, he or she is still subject to the RMD rules and could be liable for the under-distribution penalty, even if no income tax would have been due on the under-distribution.
In many cases, advance planning can minimize or even avoid taxes on traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., and taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any taxes. If you need help with planning your required minimum IRA distributions, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
One frequently overlooked tax benefit is the spousal IRA. Generally, IRA contributions are only allowed for taxpayers who have compensation (i.e. wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation.
The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $6,000 for 2020 and 2021. If the non-working spouse’s age is 50 or older, that spouse can also make “catch-up” contributions (limited to $1,000), raising the overall contribution limit to $7,000. These limits apply provided that together the couple has compensation equal to or greater than their combined IRA contributions.
Consider this example: Tony is employed and his W-2 for 2020 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA for 2020.
The contributions for both spouses can be made either to a traditional or Roth IRA, or it can be split between them as long as the combined contributions don’t exceed the annual contribution limit. However, please be cautious that the deductibility of the traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:
Consider this example: Rosa can designate her 2020 IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $196,000. Had the couple’s AGI been 201,000, Rosa’s allowable contribution to a deductible traditional or Roth IRA would have been limited to $3,000 because of the phase-out. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.
If you would like to discuss spousal IRAs or need assistance with your retirement planning, please contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Congratulations on making it to half a century! Your fifties can be a time of change. Maybe not having to work anymore sounds like a dream, but you might be concerned you don’t have enough saved for your upcoming retirement. Those concerns definitely aren’t unfounded as 40 million households in America have no retirement savings at all. Additionally, the Federal Reserve found that as of 2016, the median account balance of most retirement assets was only $60,000 with an average of $228,900. Given that healthcare and housing costs alone can easily deplete that amount during retirement, this is a growing concern nationwide.
This is why your fifties are a crucial period to continue to build up your retirement savings. This is especially true if you didn’t get to save as much when you were younger due to lower earnings, recessions, caring for children, or other roadblocks. While you may be facing new difficulties, you still must prioritize retirement savings. The good news is that there are many tax-advantaged savings strategies you can leverage once you reach age 50 or 55 to start catching up to where your retirement contributions should be. Here are some smart money moves you can make when you turn 50:
Most standard retirement plans have a catch-up contribution that kicks in once you turn 50. These catch-up caps are separate of the indexed annual cap on your retirement contributions:
For example, if you have a 401(k) at work, the cap for 2020 is $19,500 so your total annual contribution can be as high as $26,000 if you are 50 or older. If you have an employer match, you should take advantage of this cap and additional catch-up contribution to maximize your savings as employer matches are the closest you can get to free money.
Medical expenses are a cold hard reality at any age, but especially once retirement approaches. HSAs are tax-advantaged savings plans where the funds grow tax-free, and distributions are also tax-free provided that you had medical bills.
You must be enrolled in a high-deductible health plan, and Medicare enrollees aren’t allowed, so you need to take advantage of this strategy while you are still enrolled in a health plan. For self-only coverage, the minimum deductible is $1,400 and maximum is $6,900 for 2020 ($2,800 and $13,800 respectively for family coverage).
Your contribution limit can vary based on the type of health coverage you have, your age, when you became eligible, and when you’re no longer eligible. Assuming your coverage is consistent, you can contribute up to $3,550 to an HSA if you have self-only coverage ($7,100 for family).
HSAs often function as supplementary retirement assets because you don’t pay any tax on distributions made after you turn 65, or you become permanently and totally disabled. They are frequently overlooked, but you should contribute to an HSA so long as you have a qualified health plan.
The need for care is going to be a reality for millions of Americans who may not have much family to help them out in retirement age or don’t want to burden their loved ones. Keep in mind that 70% of Americans over 65 end up needing long-term care. If you don’t already have long-term care insurance, you need to start comparing rates now. Some policies are even bundled with life insurance, or act as a hybrid of the two insurances, if you want to ensure that your loved ones will be cared for if anything happens to you sooner.
If you are self-employed, you can deduct your long-term care insurance premiums. Some states also offer tax benefits regardless of employment, such as New York, Idaho, and Indiana. For federal tax purposes, you can deduct long-term care insurance premiums as a medical expense exceeding 10% of your adjusted gross income, although the 2018 tax reform has vastly reduced the number of taxpayers who itemize.
Entering your fifties can feel like a pivotal transition. No matter how much saving and preparing you were able to do earlier in your life, there is still plenty of time (and you have many options) for “catching up” or continuing to improve your financial position for the long-term. If you are looking for a trusted advisor to help you navigate financials, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in March 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Major life changes are an exciting and emotional time. But with the positive changes, there can sometimes be challenges too. If you’re facing a change in your life in the near future, have you thought about what the tax implications might be? Below are four examples of life changes that can have complicated effects on taxes that come with them:
Whether it’s a new, exciting opportunity or the result of being laid off, a job change is going to affect your tax obligation. The termination of your previous job likely adds additional taxable income in the form of accrued vacation or a severance package. Review how your former employer handles tax withholdings, especially for big payouts. Your new job also brings new tax implications with a new salary, new benefits and possibly different taxing jurisdictions if you also move to a new location.
The extra money you earn when adding a second job or business also brings extra taxes. How much additional tax this second income creates depends on your specific situation. Employment status, type of business, and how it relates to your other tax activities need to be considered. The extra income alone can send you into a higher tax bracket.
Your retirement plans and timing of retirement plan distributions play a big role in how much tax you will pay on your retirement earnings. For example, with traditional IRAs, there are early withdrawal penalties before you reach age 59½ and required minimum distributions after reaching age 70½ years old. For Social Security, collecting benefits early means less in monthly benefits and potentially a higher tax obligation if you have additional earnings. Each source of retirement income has its own set of taxation rules which can create a very complicated tax environment.
When selling a house or other residential property, the first thing to determine is whether it’s your primary residence. If so, the IRS provides an exemption from tax for up to $250,000 ($500,000 for joint couples) of the gain realized from the sale of your home as long as you lived in it for at least two of the previous five years. Any gain above the exemption is subject to capital gains tax. If the property you are selling is not your primary residence, capital gains tax applies, and you also have to deal with other more complicated tax code issues.
We hope this helps you become more aware of how your tax situation might change in the future based on any decisions you make in your personal or professional life. Always remember to carefully weigh your options and speak with your accountant if you’re unsure about how a future decision will impact your taxes. Contact Cray Kaiser if you have any questions.
It is critical for 401(k) plan administrators to be aware of the various provisions found within the plan document, as well as regulations affecting the plan. Although each plan is unique, and many errors can occur in plan administration, there are five common errors to avoid when administering your company’s 401(k) plan.
Age 65 has traditionally been when most people retire. In recent years, working past your mid-sixties is becoming more and more common. Working past 65 has many benefits, like continued income and employer-sponsored health insurance, but it could impact your Social Security and Medicare entitlements. If you’re planning on working past retirement, here are some helpful ways to plan so that you can make the most of your federally sponsored benefits.
Depending on your birth date, your “full” retirement age ranges from 65 to 67. You can start receiving Social Security benefits as early as age 62, but the amount will be reduced from what you’d receive at full retirement age. Anything that’s withdrawn early above the current annual amount of $17,040 will be penalized $1 for every $2 that’s taken out.
If you can, you should consider forgoing your benefits until age 70, which is when you’ll reach your maximum eligible amount. By delaying your benefits, you’ll receive a bonus percentage depending on how long you wait past your retirement age. Waiting longer than that isn’t advisable since the bonus calculations stop after age 70.
It’s important to note that if you continue to work and withdraw Social Security benefits, up to 85% of your benefits may be subject to income tax depending on your earnings. Also, you’ll pay Social Security and Medicare taxes on any income you earn regardless of whether you’re withdrawing benefits or not.
You’re automatically eligible for Medicare the year that you turn 65. There are four types of Medicare coverage:
• Medicare A: covers hospital and nursing home stays, but not doctor’s fees
• Medicare B: general medical coverage like doctor’s visits, lab tests, and x rays
• Medicare C: supplemental medical insurance through private insurance plans
• Medicare D: prescription drug coverage
It’s a good idea to sign up for Medicare A as soon as you’re eligible, since it’s free and provides additional insurance coverage even if you have a plan through an employer. Parts B and D do have premium costs and are usually used as standalone plans if you’re not covered by an employer. You can also delay signing up for B and D until you’ve stopped working. Part C can subsidize your existing insurance and sometimes includes additional benefits like dental, vision and prescription coverage.
Whether it’s to have more financial security or simply because you enjoy it, working beyond retirement can have many benefits. While working past retirement can have an impact on your tax obligations and benefits eligibility, it’s typically less complicated than it seems. To make sure that you’re choosing the best path for you, contact Cray Kaiser today.
It’s a difficult thing to think about, but one day you could be taking care of an elderly parent who’s in declining physical or mental health. Whether or not you work with your parents in a family business, it’s important to recognize the financial stress and list of “to dos” that come with the emotions of this phase of life and to know how to talk about finances. By taking steps to ensure finances are in order now, you’ll be more prepared to handle those matters down the road. In turn, you’ll have the ability to focus on the health and quality of life of your parents as they age.
While your parents may be reluctant at first, it’s important to talk to them about their financial affairs. Knowing information such as where important documents are kept and the name of their accountant will better equip you to help them settle their affairs.
To open the conversation with your parents, here’s how to talk about finances with your aging parents:
Find out where your parents keep the following records:
Make a list of these items and review them with your parents:
Find out if your parents have these planning assets. If they don’t, talk to them about how you can support them in putting these plans in place:
Learn about your parents’ current financial situation, including:
At Cray Kaiser, we recommend keeping all of this vital information in a Crash Card. You can learn more about Crash Cards and download a template here.
Don’t worry about gathering every bit of information in one sitting. Rather, think of this list as a starting point for a series of conversations. Wherever possible, involve your parents in putting their own affairs in order. If you’d like additional guidance on how to talk about finances with your family, contact us today.
If you’re about to retire, there are many important financial decisions to be made. Most people will depend on their retirement accounts to provide income for their non-working years, but how much and when you withdraw varies by individual. If you’re delaying your distributions past your retirement to maintain the tax-deferment benefits, there will come a time when you must begin withdrawing funds from your retirement savings accounts.
The rules surrounding how and when you must start taking disbursements from your retirement plans are highly complex, and the penalties are severe. Here’s a guide to how you can avoid hefty fines by making withdrawals from your accounts on schedule.
According to IRS rules, you’ll have to begin taking required minimum distributions (RMDs) from any retirement plan (except Roth IRAs) starting at age 72, whether you need the funds or not. For those individuals who attain age 70 ½ prior to December 31st, 2019, the age requirement for RMDs is 70 ½. Employer or self-employed sponsored plans, pensions, profit sharing plans, and plans for not-for-profits and government agencies are all subject to the same RMD rules.
You’ll need to start taking your required RMDs starting on April 1st of the year following when you’ve reached your RMD age. For example, if you were 70 ½ at some point during 2019, you’ll need to take your first RMD on April 1st of 2020. If you turn 70 ½ during 2020 or later, the first RMD is due on April 1st of the year following the year you turn 72. The deadline for RMD withdrawals for subsequent years is December 31st of each year. Therefore, if you took your first RMD distribution in 2019, you’ll need to take at least one more before the end of 2020.
To calculate your yearly RMD amount, divide the balances in all of your retirement plans on December 31st of the year before the withdrawal applies, and divide it by your corresponding factor in the IRS expectancy table. Even if you have multiple retirement funds, you can take your RMD from just one or any combination of your accounts. In order to avoid any confusion and mistakes, it’s best to work with your tax professional to ensure you’re using the right figures.
The regulations around RMDs are strict, and IRS takes these distributions very seriously. Once you start, you’re expected to continue to take yearly RMDs without exception, and not doing so has severe penalties. If you miss an RMD withdrawal, the penalty is a whopping 50% of what you should have taken! Since you’re required to pay income taxes on the distributions, a missed RMD means that the amount you receive from a missed withdrawal could be only a sliver of what it should have been.
With all the busyness at year-end, waiting until the very end of the year is risky. Because it can take several days, if not longer, for the transactions to process, we suggest that you finalize your RMD plans for the year by December 1st. Contact Cray Kaiser today to make your RMD arrangements before the end-of-year deadline.
Please note that this blog is based on tax laws effective in January 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
There are plenty of advantages to self-employment, but there are also a lot of additional responsibilities that aren’t part of the picture when you’re an employee. One of the biggest advantages and drawbacks is the lack of structure for benefit plans. As a self-employed person (with no other employees), you have the freedom to set your own policies, schedule and so forth. But, many of the structures that we take for granted, such as health insurance, taxes, and retirement plans, are solely up to you to set up and maintain. So, you may be wondering where to start when it comes to selecting a retirement plan. We’re here to help.
The two most popular retirement savings plan options for self-employed individuals with no employees are the SEP (Simplified Employee Pension) IRA and the Individual (or Solo) 401(k). As with most things in the financial realm, there’s no such thing as a one-size-fits-all solution, so it’s important to understand which option is best for you. Below we outline both options for self-employed persons (with no employees) at a high level, with a focus on the different benefits to each.
Contributions: The main advantages to a SEP IRA are ease of use, minimal responsibilities for the account owner and flexible timing of contributions. With this plan, you only make contributions from your business as an employer, not as an employee, which is deductible against your adjusted gross income (AGI) on your individual 1040. This plan allows you to open and fund an account right up until you file your tax return. So it’s great for procrastinators or if you need to have flexibility around contributions based on cash flow.
Contribution Limit: The contribution limit for the SEP IRA is 20% of your net income (minus the self-employment tax), up to a maximum of $54k per year. Your contributions are pre-tax, so they will be taxed upon withdrawal.
Roth Options: The SEP IRA does not have a Roth option. Since your income tax bracket could be much higher at retirement than it is currently, you’ll need to weigh the risk of paying more taxes on withdrawal against the simplicity of the SEP.
Loans: Loans against IRAs including the SEP IRA are not permitted under current IRS code.
Contributions: The Individual 401(k) allows you to contribute from two sources: as an employee and an employer. The contribution rules are stricter than the SEP IRA, and the administrative demands are higher. The deadline for establishing the plan is by the fiscal year end of the business year (typically December 31). Your employee contributions can be made throughout the year, but no later than the fiscal year end of the business year. The employer portion of your contributions can be made up to the filing deadline (or the extension deadline), and there’s a 5500 Form filing requirement.
Contribution Limits: An Individual 401(k) with a profit sharing component allows you to contribute up to $18k as an employee, and then an additional 20% of your net income as an employer annually. If you’re over 50, you can contribute up to an additional $6k of income via a ‘catch-up’ provision, making this an excellent option for someone who’s a little behind the curve on saving for retirement. Regardless of the source, the total contribution limit is $54k ($60K with the ‘catch-up’ provision). The total contribution is deductible against your AGI on your individual 1040.
Roth Options: The employee portion of the contribution can be counted as a Roth contribution, which means it’s after tax. This is ideal if you’re anticipating being in a higher tax bracket upon withdrawal.
Loans: Another advantage to the Individual 401(k) is that you can take loans against your plan. You can take up to 50% of the vested value or $50K, whichever is smaller. This gives you more options for obtaining funds for some of life’s other needs or unexpected surprises without the tax or penalties of withdrawing from your retirement account.
Margaret is 60 years old and self-employed (with no employees) and her business earned $100k in net income (after self-employment taxes). If Margaret has a SEP IRA, she would be able to defer $20k (20%) of her business income. If she has an Individual 401(k) with a profit sharing component, she can defer $44k of her business income from her employee deferral ($18K), employer contribution ($20K), and by using the ‘catch-up’ provision ($6K). Ultimately, it’s up to Margaret to weigh the pros and cons of using a SEP IRA or an Individual 401(k). The Individual 401(k) allows her to defer a higher amount, but she may prefer the flexibility of the SEP IRA.
Selecting, setting up and maintaining your retirement plan is a complex process, and it’s easy to overlook the details when you’re doing it alone. Saving for retirement is a critical step in securing your future, and Cray Kaiser can assist you with understanding which plan is right for your specific needs. Contact us today to get started or to make sure you’re on the right track!
Please Note: Policies and percentages are all reflective as of 2017. We will make updates as needed to reflect any changes. Should you have questions in the meantime, please contact us.
It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand benefit plan audits, when you’ll need one, and what to expect during the process.
If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year. Participants include people in the following four categories:
If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.
For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.
The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.
While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.
To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:
In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.
At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon. Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared for benefit plan audits.