Backdoor Roth IRAs are a frequently-discussed topic on physician blogs and social media sites. But most conversations assume you understand basic investing concepts that many novice investors don’t. I’ve written this post as a reference guide for anyone who needs help with the mechanics on how to set up a backdoor Roth IRA. Continue reading
As most of you are aware, Congress closed out 2019 by passing The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE), a year-end bill with tax and financial planning implications that many of you have been asking about. With thanks to our colleague, David Hultstrom, CFA, CFP® (who kindly gave us permission to take the article he wrote, modify for our clients, and share), we have prepared a summary and brief analysis for our clients and reader. The two sections below divide the information into two parts: “major”, affects most of you (immediately below), and “minor”, less-consequential changes at the end, which you may want to skip.
MAJOR AREAS OF MOST INTEREST TO OUR CLIENTS:
Section 401, Modifications to Required Minimum Distribution Rules requires those who inherit retirement plans to distribute the balance of the plan over 10 years rather than their life expectancies, as before. Relevant details:
1) This does not apply to spousal beneficiaries.
2) This does not apply to those who have already inherited a retirement plan.
3) We should re-evaluate any estate planning documents stipulating that your retirement account is to be left to a trust for the benefit of your heirs.
4) If your taxable (i.e. non-Roth, non-basis) retirement plan balances will to be high enough to potentially place heirs in a higher tax bracket over the 10-year withdrawal period, then we should evaluate Roth conversions before death.
Section 114, Increase in Age for Required Beginning Date for Mandatory Distributions changes the commencement date of RMDs (Required Minimum Distributions) from retirement plans to age 72 rather than age 70½. This applies only to those who are not yet 72. The start date for QCDs (Qualified Charitable Distributions) remains at 70½.
Section 107, Repeal of Maximum Age for Traditional IRA Contributions allows anyone over age 70½ who has earned to contribute to an IRA.
The spending bill itself, but not the SECURE Act section we have been discussing repeals the “kiddie tax” (basically tax on unearned income for a child under 18, or under 24 and a full-time student) enacted by the 2018 Tax Cuts and Jobs Act (TCJA). Those earnings will again be taxed at the parent’s marginal rate as they previously were, rather than at trust tax rates.
Unrelated to this bill, but a recent development worth including here changes the life expectancy tables used to calculate RMDs, beginning in 2021. As an example an 80-year-old using the standard table would previously have used a life expectancy of 18.7; that will be 20.2 years in 2021. This means the required distribution will decrease from 5.35% to 4.95% at 80. Not a huge change, but helpful.
Below, you’ll find a brief description of each section of the bill. Each section and a description is in BOLD; non-bold portions summarize and comment on the sections.
THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (THE SECURE ACT)
TITLE I: Expanding and Preserving Retirement Savings
SEC. 101. MULTIPLE EMPLOYER PLANS; POOLED EMPLOYER PLANS allows two or more unrelated employers to join a pooled employer plan.
SEC. 102. INCREASE IN 10 PERCENT CAP FOR AUTOMATIC ENROLLMENT SAFE HARBOR AFTER 1ST PLAN YEAR increases the max 401(k) contribution for employers using an automatic enrollment safe harbor plan from 10% to 15%.
SEC. 103. RULES RELATING TO ELECTION OF SAFE HARBOR 401(k) STATUS is a simplification of safe harbor rules.
SEC. 104. INCREASE IN CREDIT LIMITATION FOR SMALL EMPLOYER PENSION PLAN STARTUP COSTS increases the tax credit for small businesses who set up a retirement plan.
SEC. 105. SMALL EMPLOYER AUTOMATIC ENROLLMENT CREDIT provides a small tax credit for employers who set up a new plan with automatic enrollment.
SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES allows these payments to be treated as “earned income” for purposes of funding a TIRA/Roth.
SEC. 107. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS is covered above.
SEC. 108. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS THROUGH CREDIT CARDS AND OTHER SIMILAR ARRANGEMENTS makes plan loans less convenient (which we’re happy about)
SEC. 109. PORTABILITY OF LIFETIME INCOME OPTIONS was necessary due to section 204 below.
SEC. 110. TREATMENT OF CUSTODIAL ACCOUNTS ON TERMINATION OF SECTION 403(b) PLANS allows in-kind distribution of terminated 403(b) plan balances.
SEC. 111. CLARIFICATION OF RETIREMENT INCOME ACCOUNT RULES RELATING TO CHURCH-CONTROLLED ORGANIZATIONS clarifies that church-controlled organizations can have retirement plans.
SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS MUST ALLOW LONG-TERM EMPLOYEES WORKING MORE THAN 500 BUT LESS THAN 1,000 HOURS PER YEAR TO PARTICIPATE is self-explanatory.
SEC. 113. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS IN CASE OF BIRTH OF CHILD OR ADOPTION allow up to $5,000 to be withdrawn from your IRA and repaid later.
SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS is covered above.
SEC. 115. SPECIAL RULES FOR MINIMUM FUNDING STANDARDS FOR COMMUNITY NEWSPAPER PLANS makes pension funding less stringent for small newspapers.
SEC. 116. TREATING EXCLUDED DIFFICULTY OF CARE PAYMENTS AS COMPENSATION FOR DETERMINING RETIREMENT CONTRIBUTION LIMITATIONS allows home healthcare workers to treat tax exempt “difficulty of care” payments as “earned income” for funding a TIRA/Roth.
TITLE II: Administrative Improvements
SEC. 201. PLAN ADOPTED BY FILING DUE DATE FOR YEAR MAY BE TREATED AS IN EFFECT AS OF CLOSE OF YEAR is a very positive change for our clients. It allows taxpayers to set up solo-k plans by the due date of tax filing, including extensions, same as SEPs, effective 1/1/20.
SEC. 202. COMBINED ANNUAL REPORT FOR GROUP OF PLANS allows plans that are basically the same to file consolidated Form 5500.
SEC. 203. DISCLOSURE REGARDING LIFETIME INCOME requires employers to show plan participants what income their plan balance is likely to generate in retirement. Most individuals have unrealistic expectations, so this is a helpful change for employees although it is (slightly) more work for employers. The DOL is to provide a model disclosure.
SEC. 204. FIDUCIARY SAFE HARBOR FOR SELECTION OF LIFETIME INCOME PROVIDER allows employer retirement plans to more easily allow annuity options. As you can imagine, insurance companies lobbied hard for this provision and celebrated its passage.
SEC. 205. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER, LONGER SERVICE PARTICIPANTS protects the benefits of participants in closed retirement plans.
SEC. 206. MODIFICATION OF PBGC PREMIUMS FOR CSEC PLANS changes funding rules.
TITLE III: Other Benefits
SEC. 301. BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS one-year repeal of the SALT (State and Local Tax) limit for a very small group.
SEC. 302. EXPANSION OF SECTION 529 PLANS allows 529 funds to be used for registered apprenticeships and up to $10,000 of qualified student loan repayments (one time, not annually).
TITLE IV: Revenue Provisions
SEC. 401. MODIFICATION OF REQUIRED DISTRIBUTION RULES FOR DESIGNATED BENEFICIARIES covered above.
SEC. 402. INCREASE IN PENALTY FOR FAILURE TO FILE increases the failure to file penalty for income tax returns to the lesser of $400 or 100 percent of the amount of the tax due.
SEC. 403. INCREASED PENALTIES FOR FAILURE TO FILE RETIREMENT PLAN RETURNS self-explanatory, applies to employers.
SEC. 404. INCREASE INFORMATION SHARING TO ADMINISTER EXCISE TAXES allows the IRS to share information with U.S. Customs and Border Protection to help collect the heavy vehicle use tax.
Bob Lewis explains what an IPS is and gives you some solid reasons for taking the time to create one for your family.
If you’re not working with a financial planner and want to get started on your own IPS, Physician On Fire has – it’s a good starting point for creating your own policy.
How to Improve Your Retirement Plan Choices with an SDBA
If you work for one of the 40% of employers that offer a self-directed brokerage account (SDBA) within their 401k plan, then you have access to what I believe is one of the best “secret” benefits of your retirement account. What is an SDBA and how can it apply to you? Continue reading
We are continually reviewing tax returns for prospective clients (and even for doc’s who occasionally reach out to me from the forum). Whether you are preparing your own tax return or using an outside preparer, it never hurts to have a second set of eyes take a look at it. But, since you may not have the luxury of having a family member who is a CPA, I’ve come up with a list of 10 easily-missed areas you should check on your own tax return: Continue reading
How often do you review your property insurance with your agent or get a second opinion? In this month’s Vlog, Michelle shares some tips to help save your money.
Tax season 2019 was an anomaly at Fox & Co. We could not live up to the 10-day turnaround we have always promised. We took on too many physicians as first-time clients. And we had a complete staffing change from 2018. As a result, I have received some complaints about our tax season service and responsiveness. In 35 years as a business owner, I have learned that for every client who complains, 10 more are either sucking it up or talking to someone who is not me. Continue reading
Tax season is over! After taking a few deep breaths and actually relaxing, I have come up with a top 10 list of things I learned from tax season. Continue reading
An HSA ((Health Savings Account) is one of the few tax benefits that did not change with TCJA 2017. Tax-wise, they are superior to 401k’s, IRAs, and Roth IRAs because you get a Continue reading
One of the most common questions we receive from solo business owners (doctors who either moonlight, have a side business, or are starting a business) is: which entity should I choose? Let’s look at the three most popular choices: Continue reading