#IRA

The federal income tax filing deadline for individuals is generally Tuesday, April 18, 2023.

The IRS has postponed the deadline to file federal income tax returns and make tax payments for certain New York storm victims until May 15, 2023, and to July 31, 2023, for certain Mississippi storm victims. The deadline has been postponed for disaster-area taxpayers in most of California and parts of Alabama and Georgia until October 16, 2023 (there is no need to file for an extension). The current list of eligible localities and other details for each disaster are always available on the Tax Relief in Disaster Situations page on irs.gov.

Need more time?

If you’re not able to file your federal income tax return by the April (or May or July) due date, you can file for an extension by the April (or May or July) due date using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you until October 16, 2023, to file your federal income tax return. You can also file for an automatic extension electronically (but only if filed by the original April due date) (details on how to do so can be found in the Form 4868 instructions). There may be penalties for failing to file or for filing late.

Note: Special rules apply if you’re living outside the country, or serving in the military outside the country, on the regular due date of your federal income tax return.

Pay what you owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if at all possible. If you absolutely cannot pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance (options available may include the ability to enter into an installment agreement).

It’s important to understand that filing for an automatic extension to file your return does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe; you should pay this amount by the April (or May or July) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.

Tax refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, the tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

IRA contributions

Contributions to an individual retirement account (IRA) for 2022 can be made up to the April due date (without regard to extensions) for filing the 2022 federal income tax return.  Certain New York storm victims have until May 15, 2023, to make contributions to an IRA for 2022; certain Mississippi storm victims have until July 31, 2023; and disaster-area taxpayers in most of California and parts of Alabama and Georgia have until October 16, 2023.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The SECURE 2.0 legislation included in the $1.7 trillion appropriations bill passed late last year builds on changes established by the original Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) enacted in 2019. SECURE 2.0 includes significant changes to the rules that apply to required minimum distributions from IRAs and employer retirement plans. Here’s what you need to know.

What Are Required Minimum Distributions (RMDs)?

Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age, or in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator, a tax professional, or your financial adviser.

Here is a brief overview of the top five ways that the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Prior to passage of the SECURE 1.0 legislation in 2019, RMDs were generally required to start after reaching age 70½. The 2019 legislation changed the required starting age to 72 for those who had not yet reached age 70½ before January 1, 2020.

SECURE 2.0 raises the trigger age for required minimum distributions to age 73 for those who reach age 72 after 2022. It increases the age again, to age 75, starting in 2033. So, here’s when you have to start taking RMDs based on your date of birth:

Your first required minimum distribution is for the year that you reach the age specified in the chart, and generally must be taken by April 1 of the year following the year that you reached that age. Subsequent required distributions must be taken by the end of each calendar year (so if you wait until April 1 of the year after you attain your required beginning age, you’ll have to take two required distributions during that calendar year). If you continue working past your required beginning age, you may delay RMDs from your current employer’s retirement plan until after you retire.

2. RMD Penalty Tax Decreased

The penalty for failing to take a required minimum distribution is steep — historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.

SECURE 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year (still steep, but better than 50%).

Also, effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.

3. Lifetime Required Minimum Distributions from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime Required Minimum Distributions. That is, a Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. Distributions to beneficiaries are required after the Roth IRA owner’s death, however.

The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts upon reaching their RMD age or avoid the requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.

Beginning in 2024, the SECURE 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who had already commenced lifetime RMDs. Any lifetime RMD from a Roth employer account attributable to 2023, but payable in 2024, is still required.

4. Additional Option for Spouse Beneficiaries of Employer Plans

The SECURE 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before required minimum distributions have commenced.

This provision will permit a surviving spouse to elect to be treated as the employee, similar to the already existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. This will generally allow a surviving spouse the option to delay the start of required minimum distributions until the deceased employee would have reached the appropriate RMD age, or until the surviving spouse reaches the appropriate RMD age, whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.

5. New Flexibility Regarding Annuity Options

Starting in 2023, the SECURE 2.0 legislation makes specific changes to the required minimum distribution rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:

• Annuity payments that increase by a constant percentage, provided certain requirements are met
• Lump-sum payment options that shorten the annuity payment period
• Acceleration of annuity payments payable over the ensuing 12 months
• Payments in the nature of dividends
• A final payment upon death that does not exceed premiums paid less total distributions made

It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty.

These are just a few of the many provisions in the SECURE 2.0 legislation. The rules regarding required minimum distributions are complicated. While the changes described here provide significant benefit to individuals, the rules remain difficult to navigate, and you should consult with a tax professional or your financial adviser to discuss your individual situation.

Footnotes:

1. A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the required minimum distribution rule. As currently written, it is unclear what the correct starting age is for an individual born in 1959 who reaches age 73 in the year 2032.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

The current rule states that you must take your first Required Minimum Distribution (RMD) by April 1^st of the year after you reach 72 and annually thereafter by December 31^st of each year. When the SECURE Act became law on December 20, 2019, the RMD age was pushed back from age 70.5 to age 72. 

Plans affected by RMD rules are: 401(k) plans, 403(b) Plans, 457 Plans, Traditional IRAs, SEP IRAs, SIMPLE IRAs, Inherited IRAs and Inherited Roth IRAs. Defined Benefit and Cash Balance plans satisfy their RMDs by starting monthly benefit payments (or a lump sum distribution) at the participant’s required beginning date.

If you’re still employed by the plan sponsor of a 401(k) and are not considered to be a more than 5% owner, your plan may allow you to delay RMDs until you retire. The delay in starting RMDs does not extend to owners of traditional IRAs, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and SARSEP IRA plans.

The RMD value is calculated based on the qualified investment account’s value on December 31^st of the prior year and is based on standardized IRS guidelines (i.e., the RMD for 2022 is based on the value of the account on 12/31/2021). The prior year’s year-end balance is divided by a life expectancy factor issued by the IRS.

 If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).

For inherited IRAs and inherited Roth IRAs, if the account was inherited before the SECURE Act was passed, you can take RMDs over your life expectancy. If you inherited the account after the SECURE Act was passed, there are no required annual distributions, but the account must be depleted within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child until they reach the age of majority. 

Now let’s take a look at the options available to you for your IRA, 401(k), or another qualified investment account subject to RMD rules.

Option 1 – Take your RMD.

This is the most straightforward option. You can take your RMD (or a greater amount if needed), withhold the appropriate federal and state taxes from the distribution, and use the net distribution as needed. If this is your first year taking your RMD, you can take two RMDs in the first required year. This is because the rules say by April 1^st following the year you turn 72. Therefore, you could take your 2022 RMD on February 15, 2023, and your 2023 RMD on June 30, 2023. Doing this would allow you to delay the first year’s RMD for tax purposes for only the first year and means that the 2022 RMD wouldn’t affect your 2022 tax return. However, Uncle Sam will eventually get his recompense and your 2023 tax return would reflect your 2022 RMD and 2023 RMD with this strategy. Note that RMDs are taxed at ordinary income rates.

Option 2 – Don’t take your RMD.

Please don’t go with this option. The IRS has a very steep penalty for those who don’t take their RMD.  The IRS penalty is 50% of the amount not taken on time.  In general, even if you don’t need the money.  You really should take it.  As you will see later, there are many options available to you even if you don’t need the money.

Option 3 – Take your RMD and invest those proceeds into a non-qualified investment account.

With this option, you would take the RMD as normal and withhold federal and state taxes and invest the net distribution into a non-qualified (taxable) investment account. The non-qualified account could be used for general savings to be used during your lifetime, an inheritance to gift to your beneficiaries after your death, or to help save for a future unexpected expense like a long-term care need.

Option 4 – Qualified Longevity Annuity Contract (QLAC).

A QLAC is a strategy where you put in the lesser of 25% of the total value of all your qualified investment accounts or $145,000. A QLAC allows you to fund an annuity contract as early as age 65 and delay income received from the annuity until age 85. The QLAC itself does not count towards the RMD calculation, but the income received from QLAC is treated as ordinary income. This sounds like the slam dunk option, right? Wrong. The answer is it depends on your unique situation (like most answers in financial planning). Yes, a QLAC would help lower the tax bill during the years you defer taking income from the QLAC, at the cost of less net money in your pocket during the early years of your retirement and annuity payments that do not generally have a cost-of-living adjustment tied to them that would increase your tax bill because you still have RMDs on top of the QLAC payments. A QLAC is generally also an irrevocable decision. We would be happy to discuss the pros and cons of purchasing a QLAC if you have further questions.

Option 5 – Qualified Charitable Distribution (QCD).

For the altruist (who also likes not paying taxes), a QCD is an option. If there is a charity (a 501(c)(3) organization) that you feel passionate about, you can donate up to $100,000 per year (as of tax year 2022) directly from your qualified investment account to that charity tax-free. This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns. The key word is “directly”, as if you physically take the RMD check and then turn around and write a check to that charity, that does not count. For those over age 70.5, QCDs can be used before you are required to take your RMD at age 72. We can work with you to make sure that your QCD is done correctly.

Option 6 – College Planning.

Maybe you have a sizable estate and are concerned about making sure your grandchildren can attend college. With this option, you can put the net RMD funds into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses (i.e., tuition, books, room and board, etc.). Contributions to this investment account may even be tax-deductible in your state. Also, since this is considered a gift, you are lowering the size of your taxable estate, which could help your heirs at the time of your passing. Normally you are only allowed to gift $16,000 per year (or $32,000 per year if you elect gift splitting with your spouse) per beneficiary. But with a 529 plan, you can gift 5 years’ worth of gifts in only one year (“superfunding”).  This means that you could potentially gift $80,000 per beneficiary for a single tax filer or $160,000 per beneficiary for a married couple into the 529 plan and lower your taxable estate by that amount. There are a few moving parts in this example, including possibly filing a gift tax return, so we would need to work with you and possibly your accountant and estate planning attorney to make sure this would all go according to plan.

Now that we have an idea of the different options available to you, we would like to illustrate examples of how some of these options can be used in a real-world setting.

*If you have a QLAC, the calculations could differ, but the general idea of the flowchart would still be the same. 

The goal of this article was to illustrate that there are many different options available to you (including ones not illustrated in this article). Also, check out this 2-minute BFSG Short which gives a high-level overview of the most important things to know about RMDs. Our team is available to discuss these concepts with you in further depth if you have any other questions and to evaluate what option would be best for your unique situation.  

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2022. While contribution limits are up for workplace plans, contribution limits for Individual Retirement Accounts are stuck at 2019 levels. Inflation means you can—and probably should—contribute more to your workplace retirement account in 2022. Check out the new limits here.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Even though tax filing season is well underway, there’s still time to make a regular IRA contribution for 2020. You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2020 ($7,000 if you were age 50 or older on or before December 31, 2020). The Internal Revenue Service (IRS) delayed the April 15^th tax-filing deadline to May 17^th, giving taxpayers an additional month to contribute for 2020. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. This relief does not apply to estimated tax payments that are due on April 15, 2021.

The extension will also provide taxpayers additional time to contribute to an Individual Retirement Account (IRA). You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2020, even if your spouse didn’t have any 2020 income.

Traditional IRA

You can contribute to a traditional IRA for 2020 if you had taxable compensation. However, if you or your spouse were covered by an employer-sponsored retirement plan in 2020, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

IF YOU ARE COVERED BY AN EMPLOYER SPONSORED PLAN:

IF YOU ARE NOT COVERED BY AN EMPLOYER SPONSORED PLAN BUT A SPOUSE IS & FILE JOINTLY

IF YOU ARE NOT COVERED BY EMPLOYER SPONSORED PLAN & FILE SINGLE THERE ARE NO INCOME LIMITS

Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain limits. For 2020, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is less than $124,000. Your maximum contribution is phased out if your income is between $124,000 and $139,000, and you can’t contribute at all if your income is $139,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is less than $196,000. Your contribution is phased out if your income is between $196,000 and $206,000, and you can’t contribute at all if your income is $206,000 or more. If you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. This is sometimes called a “back-door” Roth IRA – check out our prior blog post on Mega Back Door Roth Conversions.

If you make a contribution — no matter how small — to a Roth IRA for 2020 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for taking qualified tax-free distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2020.

Learn more about Roth in Retirement Plans by watching this short video by clicking here.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Edited by BFSG.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.