The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.
As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.
What was the original relief for RMDs?
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.
How can you take advantage of this?
This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:
Continued growth of tax-deferred assets
Opening room to make Roth IRA conversions
A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation
We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.
Connect with Merriman to discuss.
Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.
On April 20, Boeing announced a Voluntary Layoff (VLO) program in response to recent economic events. For employees who qualify, this benefit may be an opportunity to meet the goal of retirement sooner than expected. Are you wondering if you should take advantage of this program?
At Merriman, we’ve been helping Boeing employees navigate decisions like this for over 30 years. Here are the main points you should consider:
For eligible employees, Boeing is offering a lump-sum payment of one week’s pay for every year of service completed, up to a maximum of 26 years in most cases.
Employees who accept the VLO offer may also receive a few months of subsidized health insurance benefits and access to other benefits.
While employees who accept the VLO may apply in the future for open employee or contractor positions, accepting the VLO forfeits any first consideration rehire or recall rights. This program is used as a permanent separation from Boeing, causing the employee to lose those rehire benefits.
Boeing has announced the following important dates for this VLO offer:
April 27, 2020 VLO Registration Opens
May 4, 2020 VLO Registration Closes
May 14, 2020 Formal Notification Sent to Employees
June 5, 2020 Last Day on Payroll
Am I in a position to retire?
Many people may be considering the VLO offer but are unclear what retiring now would mean for their future lifestyle. This is a major decision to make in a short amount of time, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough? Will you have other income sources like Social Security or pension benefits? To help weigh your options, we’re offering a complimentary financial analysis for Boeing employees considering the VLO program.
You may have heard about the significant tax and retirement reforms recently signed into law under the catchy name Setting Every Community Up for Retirement Enhancement (SECURE) Act. These sweeping changes were drafted to promote increased retirement savings by expanding access to retirement savings vehicles, broadening options available inside retirement plans, and incentivizing employers to open retirement savings plans for their employees.
Some of these changes have a much wider impact than others, but here is a summary of the key takeaways and provisions of the SECURE Act most likely to affect you.
The age to begin required minimum distributions (RMDs) increased from 70 1/2 to 72. The later RMD age of 72 will only apply to those turning 70 1/2 in 2020 or later. Anyone who turned 70 1/2 in 2019 will still be subject to the original RMD rules. While not a huge delay, individuals could benefit from an extra year and a half of compounding returns if they choose not to withdraw funds from their Traditional IRA. It can also provide additional time to make strategic Roth conversions while in a lower tax bracket. It is important to point out that the Qualified Charitable Distribution age has not changed, so QCDs can still be made starting at age 70 1/2.
The maximum age to contribute to a Traditional IRA has been removed. You may now contribute to a Traditional IRA even if you are over 70 1/2. This is a great benefit to those continuing to work into their 70s, as contributions to a Traditional IRA are tax-deductible. After your RMDs have started, continued contributions allow for an offset of the taxable income realized from these required IRA distributions.
The Stretch IRA rule, allowing non-spouse beneficiaries to “stretch” distributions from an Inherited IRA over the course of their lifetime, has been eliminated. This provision, enacted as the funding offset for the bill, requires that non-spouse beneficiaries distribute all assets from an Inherited IRA within 10 years of the account owner’s passing. Spouses, chronically ill or disabled beneficiaries, and non-spouse beneficiaries not more than 10 years younger than the IRA owner will still qualify to make stretch distributions. Minor children will also qualify for stretch distributions, but only until they reach the age of majority for their state (at which time they would be subject to the 10-year payout rule). These new rules only apply to inherited IRAs whose account owner passed away in 2020 or later.
This change will have the most significant impact on adult children inheriting IRAs, who now will have to recognize income over a 10-year period instead of over their lifetime. For those still in their prime working years, this may mean taking distributions at more unfavorable tax rates. Trusts named as IRA beneficiaries also face their own set of challenges under the new law. Many are now questioning whether they should start converting Traditional IRA assets to a Roth IRA, or significantly increase conversions already in play. Unfortunately, there’s not a one-size-fits-all answer to this question. It’s highly dependent on a number of factors, including current tax brackets, potential tax brackets of future beneficiaries, and intentions for the inherited assets. We’ll explore this and additional estate planning concerns and strategies in more depth in future articles.
Here are a few other changes that are worth mentioning:
Penalty-free withdrawals of up to $5,000 can be made from 401(k)s or retirement accounts for the birth or adoption of a child.
529 accounts can now be used to pay back qualified student loans with a lifetime limit of $10,000 per person.
Tax credits given to small businesses for establishing a retirement plan have been increased.
A new tax credit will be given to small businesses adopting auto-enrollment provisions into their retirement plans.
Liability protection is provided for employers offering annuities within an employer-sponsored retirement plan.
If you have questions or concerns about how the SECURE Act impacts you, please reach out to your financial advisor or contact us for assistance.
As we reach the end of 2019, it’s time to start thinking about your finances for 2020. Many employers will begin open enrollment over the next few weeks, and this is a great time to review your retirement plan contributions.
The IRS announced earlier this month that employees will be able to contribute up to $19,500 to their 401(k) plans in 2020. They also raised the catchup limits (for those over age 50) from $6,000 to $6,500. Lastly, the 2020 contribution limitation for SIMPLE retirement accounts increased to $13,500, up from $13,000. Note that the annual contribution limit to an IRA remains unchanged at $6,000.
Summary of Changes for 2020
The new 2020 retirement contribution limits are as follows:
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If, during the year, either the taxpayer or spouse was covered by a retirement plan at work, the deduction may be reduced (phased out) or eliminated, depending on filing status and income. If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply. Here are the phase-out ranges for taxpayers making contributions to a traditional IRA in 2020:
For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA in 2020 are:
For single taxpayers and heads of household, $124,000 to $139,000.
For married couples filing jointly, the income phase-out range is $196,000 to $206,000.
For a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The 2020 income limits for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) are:
$65,000 for married couples filing jointly, up from $64,000
$48,750 for heads of household, up from $48,000
$32,500 for singles and married individuals filing separately.
It is important to note that the IRS has raised the 401(k) and 403(b) contribution limits in 4 of the last 5 years. These have been fantastic opportunities to contribute more into these retirement investment vehicles. So please make sure to adjust your recurring contribution amounts to better take advantage of this increase in limit. If you have any questions, feel free to reach out to us!
Have you received a pay raise, bonus or an inheritance and as a result changed your spending habits? Have you bought things such as expensive items, cars or even a new home because of one of these events? Soon, your lifestyle starts to inflate or creep to where your standard of living resets at this new higher income level. Spending can quickly become unsustainable if your income doesn’t stay at the same pace and continue to rise. Importantly, you’ll need to save substantially more now to continue that lifestyle in retirement than originally planned. From experience, most families continue at near the same spending level if not more in retirement, especially when grandchildren enter the picture!
There isn’t any harm with spending more money if you make more, however you need to also increase your savings for important goals at the same level. For example, if your income is now $250,000 or above, you’ll need to save quite a bit more than the $19,000 401(k) contribution to maintain your lifestyle when you decide to retire. These savings targets increase much more if you want to “make work optional” at an earlier age.
It’s inevitable that your income will rise as you progress through your career, however there are good habits to follow to prepare for the future while still enjoying the “now”:
Prepare and follow a budget
No matter your income level, having a household budget is key to achieving your goals. It allows you to put all your income and expenses on one sheet of paper to determine how much savings you can automate each month. Many households are cash flow “rich” thereby they are best served by figuring out monthly savings targets. This article discusses a budget technique that can be used as a template for your budgeting. It’s especially important to have a cash flow plan for families where cash bonuses and restricted stock make up a large portion of their annual income.
Develop and adhere to a pre-determined plan for extra income
If you receive a bonus, you should have a pre-determined savings allocation for those extra resources. This meaning that of the bonus that you receive after-tax, possibly 25% is allocated to spending (i.e. the fun stuff), 25% to travel and short-term savings, and 50% to long-term savings. That way, you get to spend and enjoy a large portion of your bonus while also saving a large sum towards the future. Too often do people receive a bonus and quickly spend it. Having a pre-determined plan or formula for how to allocate these excess dollars is important as your budget won’t account for this income.
Routinely update your retirement projections
Your financial plan needs to be updated each time your spending level increases as the plan is not going to be successful if it is based on $100,000 of annual spending in retirement when your lifestyle now requires $200,000 a year. Many households attempt to exclude child costs from this figure as they won’t have dependents in retirement, however experience has taught that the spending has been replaced by spending on trips and supporting children and grandchildren.
We suggest reading the book Making Work Optional: Steps to Financial Freedom to learn about how best to prioritize your savings to achieve your long-term goals. Importantly, make sure to read the section about “mistakes to avoid” on your path to financial freedom.
Please contact Merriman if you have any questions about developing a cash flow plan or for any of your other financial planning needs.
Executives and other highly compensated employees might notice a different option in their benefits plan, beyond the usual 401(k). Some employers also offer Section 409A nonqualified deferred compensation plans to high earners, which have their own mix of rules, regulations and potential drawbacks to navigate. However, when you’re earning income in the hundreds of thousands, it’s important to consider every option for saving on taxes and setting aside a larger nest egg for retirement. Contributing to the usual bevy of IRAs and 401(k) might not be enough to see you through your golden years, and tools like deferred compensation plans could also help you bridge the gap of early retirement.
Deferred compensation plans look a bit different than the 401(k) you already know. Like a 401(k), you can defer compensation into the plan and defer taxes on any earnings until you make withdrawals in the future. You can also establish beneficiaries for your deferred compensation. However, unlike 401(k) plans, the IRS doesn’t limit how much income you can defer each year, so you’ll have to check if your employer limits contributions to start building your deferred compensation strategy. Elections to defer compensation into your nonqualified plan are irrevocable until you update your choices the following year, and you have to make your deferral election before you earn the income. If you’re in the top tax bracket (37.0% in 2019), this can allow you to defer income now and receive it at a later date (such as when you retire) in a lump sum or a series of payments, when you expect to be in a lower tax bracket.
Unlimited contribution amounts and optional payout structures may sound too good to be true, but nonqualified deferred compensation plans also have significant caveats to consider. The big risk is that unlike 401(k), 403(b) and 457(b) accounts where your plan’s assets are qualified, segregated from company assets and all employee contributions are 100% yours—a Section 409A deferred compensation plan lacks those protections. 409A deferred compensation plans are nonqualified, and your assets are tied to the company’s general assets. If the company fails, your assets could be subject to forfeiture since other creditors may have priority. The IRS permits unlimited contributions to the plan in exchange for this risk, and the potential loss of deferred compensation can motivate company officers to maintain the health of the company.
Let’s review potential distribution options from nonqualified deferred compensation plans. A Section 409A deferred compensation plan can provide payment no earlier than the following events:
A fixed date or schedule specified by the company’s plan or the employee’s irrevocable election (usually 5 to 10 years later, or in retirement)
A change of company control, such as a buyout or merger
An unforeseen emergency, such as severe financial hardship or illness
Once your income is deferred, your employer can either invest the funds or keep track of the compensation in a bookkeeping account. Investment options often include securities, insurance arrangements or annuities, so it’s important to evaluate the potential returns and tax benefits of your deferred compensation plan versus other savings options. Plan funds can also be set aside in a Rabbi Trust; however, those funds still remain part of the employer’s general assets.
Nonqualified deferred compensation plans have a variety of structures, rules and withdrawal options depending on how your employer builds the plan. Consider the following pros and cons of deferred compensation plans when reviewing your employer’s options.
You can defer a significant amount of income to better help you replace your income in retirement. The IRS does not limit contributions.
You have the ability to postpone income in years when you’re in high tax brackets until later when you expect to be in a lower tax bracket.
If your employer offers investment options, you may be able to invest the money for greater earnings.
There are no nondiscrimination rules for participants, so the plan can benefit owners, executives and highly compensated employees specifically. Other retirement plans may limit contributions or participation due to discrimination rules.
Your deferred compensation plus any investment earnings are subject to forfeiture based upon the general financial health of the company.
The election to defer compensation and how/when it will be paid out is irrevocable and must be made prior to the year compensation is earned.
Depending on the terms of your plan, you may end up forfeiting all or part of your deferred compensation if you leave the company early. That’s why these plans are also used as “golden handcuffs” to keep important employees at the company.
The plan may or may not have investment options available. If investment options are available, they may not be very good (limited options and/or high expenses).
If you leave your company or retire early, funds in a Section 409A deferred compensation plan aren’t portable. They can’t be transferred or rolled over into an IRA or new employer plan.
Unlike many other employer retirement plans, you can’t take a loan against a Section 409A deferred compensation plan.
The questions below are helpful for assessing whether a deferred compensation plan makes sense for you.
Is your company financially secure? Will it remain financially secure?
Will your tax rate be lower in the future when this deferred compensation is paid?
Can you afford to defer the income this year?
Does the plan have investment options? Are the fees and selection of funds reasonable?
Does the plan allow a flexible distribution schedule?
Section 409A deferred compensation plans have inherent drawbacks and prominent risks, but they could help you save toward your retirement planning goals. We recommend working with a Merriman advisor to review your specific plan terms and financial situation when preparing for the future. We can help you decide whether a nonqualified deferred compensation plan makes sense for your situation, weigh issues like future taxes and create a long-term plan. We want you to feel ready for everything life has to offer.