What’s On The Horizon?
A bill being promoted as an enhancement for owners of IRAs and retirement plans has been introduced by the House of Representatives. If passed by the Senate and signed into law, this bill would have significant effects on retirement options in these plans. The House bill, named Setting Every Community Up for Retirement Enhancement, or the SECURE Act, would expand the options available to retirees and extend the age requirement for taking withdrawals and making contributions. A similar bill, titled the Retirement Enhancement and Savings Act (RESA) is in the Senate Finance Committee. The law would allow eligible taxpayers to make contributions beyond the current age limit of 70 ½ , and it would also increase the age at which participants would be required to take withdrawals to age 72, up from the current 70 ½ age. Legislators believe that some people may not begin saving until later and that coupled with increasing life expectancy may make these extensions necessary. Another important feature of the bill is that 401(k)s may start offering annuities, which guarantee the account holder regular income for as long as that person lives. This may be an attractive option for retirees who desire the security of guaranteed payouts, safe from market fluctuations. Additionally, a provision in the bill is a new benefit for part-time workers. The bill would allow employers to offer longtime part-time workers access to 401(k) plans. It would also allow small businesses to band together more easily to offer plans under a single administrator, which is intended to lead to more 401(k) plans for workers at small businesses where it hadn’t been offered previously. The bill also has allowances for parents to be able to withdraw up to $5,000 from a 401(k) plan after the birth or adoption of a child and would also allow withdrawals of $10,000 from 529 plans without penalty in order to repay student loans. Regular taxes would be owed on the distribution amount. Finally the law also eliminates the kiddie tax, in which children from low and middle-income families are hit with unexpected taxes after inheriting 401(k) plans.
When Will This Bill Become Law?
The bill is widely expected to pass the Senate and be signed into law by the President. One hurdle may be the provision by which the plan pays for itself. It contains provisions that those who inherit retirement accounts after the death of a parent withdraw funds at a faster pace – within 10 years – and pay the associated tax. Previously, inheritors of these plans could stretch out withdrawals over their lifetimes. There are exceptions for surviving spouses and minor child beneficiaries of the account holder. While lawmakers are often hesitant to pass increased taxes on those who inherit wealth, given the overwhelming majority by which the House bill passed, it’s reasonable to expect most of these provisions will eventually become law.
Health Premium Tax Credit … Still Available For 2019 Returns Filed in 2020
You may be allowed a premium tax credit if:
ü You or a tax family member enrolled in health insurance coverage through the Marketplace or Exchange for at least on month of a calendar year in which he or she was not eligible for affordable coverage through an eligible employer-sponsored plan that provides minimum value or eligible to enroll in government health coverage – like Medicare, Medicaid, or TRICARE;
ü Your health insurance premiums for at least one of those same months are paid by the original due date of your return. They can be paid either through advance credit payments, by you or by someone else;
ü You are within certain income limits. The credit is available for people with household incomes ranging from 100% to 400% of the federal poverty level … $12,140 to $48,560 for singles and $25,100 to $100,400 for a family of four.
ü You cannot file a married filing separately tax return;
ü There are exceptions for certain victims of domestic abuse and spousal abandonment.
ü You cannot be claimed as a dependent by another person and;
ü You are not eligible for the premium tax credit for coverage purchased outside the Marketplace.
Retirement – 401(k)s & IRAs: Different Ages, Different Rules
Below are the current rules:
There is legislation pending currently, the Setting Every Community Up for Retirement Enhancement, or the SECURE Act that could change some of these ages. This legislation is discussed at length in this Issue and could become law affecting distribution in 2019. Please check with me before making any distribution decisions.
401(k)s:
Before Age 55
Penalty free withdrawal is permitted if: Employment is terminated no earlier than the year in which you turn 55 AND you leave the funds in the 401(k) plan to access them penalty-free.
Age 55 – 59 ½
Distributions before age 59 ½ are subject to a 10% additional tax (penalty) plus the tax on the amount of the distribution that is included in your income. The 10% tax will not apply if you qualify for certain exceptions. Call me for details on these exceptions before requesting the distribution.
Age59 ½ – 70 ½
Normal distributions that are not subject to the 10% additional tax (penalty).
Age 70 ½
Distribution is required to begin by April 1 after the later of:
Calendar year in which you reach age 70 ½ or,
Calendar year in which you retire. However, your plan may require you to begin receiving distributions by April 1 of the year after you reach age 70 ½, even if you have not retired. Check with your company’s plan administrator for the details of your plan.
IRAs
Before Age 59 ½
A 10% additional tax (penalty) generally applies if you withdraw from your IRA. There are limited exceptions that could eliminate the 10% additional tax (penalty). Check with me on these exceptions before requesting a distribution.
Age 59 ½ – 70 ½
Normal distributions that are not subject to the 10% additional tax (penalty).
Age 70 ½
Required Minimum Distribution (RMD) by April 1of the year following the calendar year in which you reach age 70 ½. Then by December 31 of each year, including the first year.
Example: You turn 70 ½ on July 15, 2019. You must take your first RMD for 2019 by April 1, 2020. You must take your second RMD for 2020 by December 31, 2020 and your third by December 31, 2021.
What is the RMD?
Your RMD is generally determined by dividing the adjusted market value of all of your IRAs as of December 31 of the preceding year by the distribution period that corresponds with your age in the IRS Uniform Lifetime Table.
Example: Let’s say you are 73 years old and all your IRAs had a value of $100,000 last December 31. The IRS Uniform Table lists 24.7 for a 73-year-old. You would divide $100,000 by 24.7. The result $4,048.58 is your RMD!
What happens if I don’t take my RMD? If the distributions to you in any year are less than the RMD for that year, you will be subject to additional tax equal to 50% of the undistributed RMD!
IRA & 401(k) Contribution Limits Increased
Traditional & Roth IRA contributions jump to $6,000 and individuals who are age 50 or older can contribute an additional $1,000.
401(k), 403(b) and 457 Plans now rise to $19,000 while taxpayers 50 years old or older can contribute an extra $6,000.
SIMPLE IRA participants can contribute $13,000 plus $3,000 for those age 50 and over.
Myth vs. Truth
Associated with Health Savings Accounts (HSAs)
There are basically three requirements for HSA eligibility:
The account owner must be enrolled in a High Deductible Qualified Health Plan (QHDHP)
- The account holder cannot be taken as a dependent on someone else’s tax return.
- The account holder cannot have, participate in or be eligible for claims under any other public or private health benefit. This includes benefits such as (non-QHDHP) commercial insurance, Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) or Medicare.