Retirement & Savings Issues Chapter 5 pp National Income TAX Workbook

Transcription

1 Retirement & Savings Issues Chapter 5 pp National Income TAX Workbook 1

2 Retirement & Savings Issues p Rollovers, Conversions, Recharacterizations 2. Taxation of Plan Loans and Loan Offsets 3. Hardship Distributions 4. Section 529 Plans 5. ABLE Accounts 6. Custodial Accounts 2

3 Rollovers p. 128 Defined as a transfer between qualified plans Nontaxable if: Direct or trustee-to-trustee Qualified 60-day rollover 3

4 Rollover Distribution Exceptions p. 128 RMD s Loans Hardship Excess contributions & earnings Substantially equal periodic payment Opting out of automatic contribution arrangements Pay accident, health, or life insurance Dividends on employer securities S corp allocations 4

5 Rollover Rules pp Direct or Trustee to Trustee: No income tax withholding No one-rollover per year limit 60-Day Rollover: Subject to income tax withholding Subject to one-rollover per year limit Can be considered RMD 5

6 60-Day Requirement pp Transfer complete by 60 th day after receipt If 60 th day is holiday/weekend, must finish transfer before holiday/weekend Waiver if beyond TP s reasonable control or waiving = equity, good conscience 3 ways to get a waiver 6

7 Automatic Waiver Institution received funds before 60 th day, p. 131 TP followed all procedures, Failure to deposit was institution s fault, & Funds deposited into eligible plan w/in 1 year from date TP received them 7

8 Private Letter Ruling Waiver Procedures outlined in Rev. Proc , $10,000 user fee IRS considers: Error by financial institution personnel p. 131 TP unable to complete w/in 60 days due to issues beyond TP s control Whether TP used the distribution Amount of time since distribution 8

9 Self-Certification Waiver pp Rev. Proc No prior IRS denial of a waiver request Reasons for delay must be due to: 1. Financial institution error 2. Check misplaced & never cashed 3. Deposited into acct TP thought was eligible 4. TP s residence severely damaged 5. Death in family 9

10 Self-Certification Waiver pp Reasons for delay, cont d: 6. Serious illness of TP or family member 7. TP incarcerated 8. Restrictions imposed by foreign country 9. Postal error 10. Distribution due to tax levy and funds were returned to TP 11. Distributor did not provide info to TP 10

11 Self-Certification Waiver p. 132 Rollover made as soon as possible after reasons preventing it no longer exist Deemed to be timely if w/in 30 days after reason for delay no longer present Subject to later audit determination Easier, faster, & cheaper than PLR 11

12 Spousal Rollover of Inherited IRA p. 132 Can treat IRA as your own by rolling to IRA, or to extent taxable, to qualified plan Must be sole beneficiary Must have unlimited right to withdraw Election at any time after death Nonspouse may not roll over any distribution from the plan or IRA 12

13 Withholding on Distribution pp IRA Subject to 10% withholding unless: TP elects out of withholding, TP chooses different amount withheld, or Trustee-to-trustee transfer Retirement plan mandatory 20% withholding Unless a direct rollover TP must find other monies for rollover 13

14 Rollover of Nontaxable Amounts p.133 Rollover from qualified plan limited to taxable amounts of distribution Exceptions: Rollovers to an IRA Direct rollovers to plan that accounts for taxable & nontaxable amounts If taxable & nontaxable $, amount rolled from taxable $ first 14

15 Roth Conversions p. 134 Can convert Traditional IRA to Roth by trustee-to-trustee or 60-day rollover If RMD applies, take first before rollover Report taxable conversion on F8606 No income limits on conversions If SIMPLE plan must be 2-year participant 15

16 Tax on Roth Conversions Taxed as if distribution not rolled Basis in IRA will = taxed amount p. 135 No early withdrawal conversion Penalty if w/drawn from Roth w/in 5 years All IRAs must be aggregated to determine taxable portion of conversion Normal rules apply for determining 16

17 Reasons for Roth Conversions Postpone distributions Lower RMDs from traditional IRA Reduce taxable Soc. Sec. $ Expiring carryovers (NOL, credits) Unusually large itemized deductions Planning for AGI or tax inc. limited items Reduce Medicare Plan B premiums Back-Door Roth Contributions p

18 Recharacterizations Change contribution made to Roth to traditional or made to traditional to Roth Prior law: Allowed back and forth conversions of entire amount New law (2018 & on): only current-year contributions Trustee-to-trustee by return due date Treated only as contributed to 2 nd IRA p

19 Taxation of Plan Loans & Offsets p. 137 Loans allowed from certain qualified plans Loans NOT allowed from IRAs If plan allows loans, then 1. Loans available to all 2. Not to highly-comp in greater amounts 3. Made in accordance with plan terms 4. Bear a reasonable interest rate 5. Be adequately secured 19

20 Plan Documents p. 138 Loan provisions that must be in plan: Person, or title, of the individual authorized to administer the loan program Procedure to apply for a loan Criteria used to determine approval of the loan Limits on the types & amounts of loans available How the interest rate is determined The collateral required for the loan Describes loan default events & collection steps 20

21 Loan Interest & Security p. 139 Interest rate must be reasonable Evidenced by legally enforceable agreemt Max aggregate amount cannot > lesser of $50,000 or Greater of 50% of PV of EE s accrued balance (nonforfeitable) or $10,000 5 year payback (N/A if to buy home) Level amortization payback at least qtrly 21

22 Loans Treated as Deemed Distributions p. 139 Loan in default = taxable distribution for remaining balance Loan in excess of max = distribution to the extent exceeds max May be subject to early 10% penalty Cannot be rolled Late repayments after deemed distribution increase beneficiary s tax basis 22

23 Plan Loan Offset pp Loan repaid by accrued benefit in the plan 1. Before distribution, repay loan immediately or treated as default 2. Actual default on payments 3. Loan offset at termination Actual distribution for all tax purposes Plan must allow in-service distributions Plan offset is eligible rollover distribution 23

24 Spousal Consent Spousal consent needed to use accrued benefits to secure loans if plan has QJSA (90-day period ending date loan secured) p. 140 Proposed regs increased period for consent to 180 days Plans may use either 90 or 180 days 24

25 Hardship Distributions p (k) & 403(b) allowed to provide for hardship withdrawals Generally taxable, may be subject to 10% penalty 457(b) plans allow for Unforeseeable Emergencies (UE) withdrawals Generally taxable, NOT subject to 10% penalty Generally not eligible for rollover 25

26 Plan Requirements pp Permanently reduces account balance Plan requirements: Defines a qualified hardship Cannot discriminate, apply equally to all Distribution limited to elective contributions Heavy/Immediate need, not met by other means Limited to amount of need, related tax & penalty 26

27 Defining a Hardship 401(k) Plans p. 142 Deductible medical care Costs related to residence purchase Tuition etc for next 12 mos for employee, spouse, children or dependents Payments to prevent eviction/foreclosure Payments for funeral/burial parents, spouse, children or dependents Repair of casualty damage to residence 27

28 Hardship Distributions pp Unforeseeable Emergency (UE) - 457(b) Severe financial hardship resulting from Illness or accident Loss of property due to casualty Similar extraordinary/unforeseeable circumstances beyond the control of the individual Not home purchase or education costs Not UE to extent could be reimbursed 28

29 Financial Need p. 143 Not considered necessary if other resources are available (including spouse & children) Safe harbor rules available Obtained all available loans & distributions No elective or employee contributions for 6 months Distribution may not exceed amount of need plus tax and penalty due to distribution 29

30 Reasonable Reliance p. 143 Employer may rely on employee statement of immediate heavy financial need Employer cannot rely on statement if they know relief is available from: Insurance or other reimbursement Liquidation of employee s assets Stopping any employee contributions to plan Other currently available plan loans Loans from commercial sources 30

31 Hardship Distribution Documentation pp Plan sponsor must maintain records Hardship request Review and approval of withdrawal Financial info that substantiates need Documentation that distribution qualifies under plan document Participant may provide summary of info in source documents (requirements p. 144) 31

32 Hardship Distributions From an IRA p. 144 IRAs can allow for hardship withdrawals Generally are taxable and may be subject to 10% early withdrawal penalty Not subject to penalty if: Expenses like those allowing hardship distributions from a retirement plan Higher-education expenses First-time home buy (up to $10,000) 32

33 Section 529 Plans pp Structured savings plans Contributions to an investment account Earnings tax-free Distributions tax-free if used for qualified higher education expenses After 2017 includes K-12 (10K) 33

34 Section 529 Plans Requirements Established by state, state agency, or instrumentality of state Cash contributions only Safeguards to prevent over contributing Separately account for each beneficiary Limit investment options to those of plan p. 145 Direct investment up to 2 times/year 34

35 Taxation of 529 Plans pp No AGI/income limitations for contributing No federal tax deduction for contribution State may allow deduction or credit Contributions not taxed to beneficiary Qualified distributions not taxed Prior to 2018, loss allowed if all 529 accounts in same state fully distributed (Misc 2%). No loss for

36 Gift Tax Issues on 529 Plans p. 146 Contribution ARE gifts Contributions > exclusion, may elect to account for them ratably over 5 years Elect on Form 709, report 1/5 of amount Generally distributions are NOT gifts Beneficiary change not taxable if same or higher generation & related to original 36

37 Estate Tax Issues on 529 Plans p. 146 Not included in estate of donor unless elected 5 years for gift & dies < 5 years Amounts distributed due to death of beneficiary included in beneficiary s estate Owner should designate successor owner on the account 37

38 Changing Plans or Beneficiaries Rollover within 60 days to: p. 146 Another 529 plan for same beneficiary 529 plan for another related to original : ABLE account for beneficiary or family member Rollover once per year per beneficiary 38

39 Section 529 Plans pp Rollovers Family member: the designated beneficiary s spouse; the designated beneficiary s child or a descendant of a child; brother, sister, stepbrother, or stepsister; father or mother, or an ancestor of either; stepfather or stepmother; niece or nephew; aunt or uncle; son-inlaw, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; the spouse of any individual described in 2; and the designated beneficiary s first cousin. 39

40 Unique Rollover Situations p. 147 Can roll US savings bonds and Education Savings Accounts (ESA s) to 529 Refund from educational institution can be recontributed by beneficiary w/in 60 days of receipt Funds from UGMA/UTMA accounts can be contributed to

41 Qualified Distributions from 529 Plan p. 147 Tax free if used for qualified education expenses: Tuition, fees, books, supplies, equipment Special needs services expense related to enrollment or attendance Computer, peripherals, software, internet if primary use by beneficiary while enrolled Room and board if half-time or more After 2017 K-12 expenses up to $10,000 41

42 Nonqualified Distributions p. 148 Any expense paid by other programs or used for an educational credit disregarded in determining QHEE (no double benefit) Distributions that exceed limits or QHEE taxable to the beneficiary 42

43 10% Additional Tax p. 149 Subject to 10% tax unless distribution is: 1. Made after death of beneficiary 2. Attributable to beneficiary s disability 3. Made because of a scholarship etc. to the extent it is not > scholarship etc. 4. Made because of attendance at a military academy to extent it is not > costs of attendance 5. Taxable solely because QHEE considered in education credits 43

44 Impact on Financial Aid p. 150 Owned by student or parent Treated as countable asset of parent 5.64% treated as part of the EFC Distributions not part of EFC Owned by other than student or parent Not included in assets on FAFSA app Distributions treated as student income 50% included in EFC 44

45 ABLE Accounts Requirements pp Contributions to meet qualified disability expenses 2. Must limit beneficiary to 1 ABLE account 3. Must prohibit noncash contributions 4. Annual contributions gift tax exclusion 5. Separate account for each beneficiary 6. Investment changes 2 times/year or less 7. Prohibit pledging account as security 8. Safeguards to avoid excess contributions 45

46 Tax Treatment of ABLE Accounts Tax-deferred accumulation No federal deduction for contributions Some states may allow deduction Distributions taxable to extent of earnings if distribution > qualified disability expenses p. 151 Taxable portion subject to additional 10% tax N/A if distribution after death of beneficiary All the year s distributions treated as one 46

47 Gift & Estate Tax on ABLE Accounts p. 152 Gift Tax: Contribution are gifts, exclusion applies Distributions not taxable gifts Beneficiary change not taxable gift if new beneficiary is eligible & related to original Estate Tax: Includible in estate of beneficiary (owner) Qualified disability exps may be deductible 47

48 6% tax on excess maximum limit Excess Contributions: Excess over annual max limit may be subject to 6% excise tax Tax imposed on designated beneficiary Tax N/A if trustee makes distribution of excess + earnings by beneficiary s return due date (+ extension) p

49 Changes in Designated Beneficiary ABLE may be rolled to another account of beneficiary or account of new beneficiary Sibling or step-sibling who is eligible Close original account w/in 60 days Only one rollover per year Annual contribution limit not impacted p

50 529 Plan Rolled to ABLE Accounts 529 plan may be rolled to ABLE if ABLE owned by beneficiary or family member p. 152 Rolled amounts count towards annual limit Rolled amounts over limit, includible in income & earnings taxed 50

51 Eligible Individuals for ABLE Accounts p. 153 Beneficiary must be eligible individual Owner of ABLE is beneficiary Eligible individual: Disability certification filed with IRS or Entitled to SSDI or SSI Disability cert by eligible/parent/guardian Include doctor signed copy of diagnosis Disability occurred before age 26 51

52 Qualified Disability Expenses Expenses related to individual s disability made for their benefit Education, employment training & support Housing, transportation Assistive technology & equipment Health care, legal fees, funeral/burial Expenses to improve health, independence, quality of life p

53 Unique ABLE Account Rules pp Upon death of beneficiary, state can file claim for payment from ABLE for medical paid thru state s Medicaid plan ABLE account and distributions disregarded in federal means-tested programs Exception: SSI distribution for housing Exception: SSI balance > $100,000 53

54 Tax on Custodial Accounts Account for minor beneficiary under Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) Account owned by & taxed to beneficiary 2017: Kiddie tax : Trust and estate rates If used for support, taxed to one with legal obligation to support p

55 Gift & Estate Tax on Custodial Accounts p. 156 Gift Tax Transfers to acct = gift, present interest No taxable gift if custodian resigns or custodianship terminates Estate Tax Included in estate of owner/beneficiary Included in donor s estate if dies while custodian or within 3 years of transfer 55

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