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Retirement Legislation

How Year-End Legislation May Have Affected Tax Season

In late 2020, Congress passed the Consolidated Appropriations Act, which included many tax provisions and extenders as well as additional COVID-19 stimulus relief.

For example, the ability to deduct up to $300 in charitable contributions if the taxpayer doesn’t itemize has been extended for an additional year. The business meal deduction has been increased from 50% to 100% through the end of 2022. The act also extended the repayment period through Dec. 31, 2021, for employers that opted to defer employee payroll taxes in the latter part of 2020.1

As we approach tax season, it could be beneficial to get up-to-date on provisions that may apply to your filing this year. We’re noting just a few here. We recommend you work with a qualified tax professional to understand the opportunities that may benefit you and ensure your taxes are filed accurately and on time. If you would like to learn how insurance products may help you create tax-efficient strategies moving forward, please feel free to reach out to our office.

One of the tax provisions the appropriations bill made permanent was the lower medical expense deduction floor. This means taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income — down from 10%. However, the bill also extended some tax provisions for another two years, including the residential energy efficient property credit.2

Speaking of energy efficiency, other credits extended for one year include the qualified fuel cell rules for alternative motor vehicles, the alternative fuel refueling property credit and the credit for two-wheeled plug-in electric vehicles.3

Penalty-free distributions from qualified retirement plans for COVID-related reasons expired at the end of 2020. However, the act offers a similar option for non-coronavirus-related disasters, such as wildfires and hurricanes. If a taxpayer is affected by any type of federally declared disaster, he may withdraw up to $100,000 from a qualified plan or IRA through June 25, 2021. Similar to the COVID-related withdrawal rules, disaster-related distributions are exempt from the 10% early withdrawal penalty that normally applies but are subject to ordinary income tax treatment. Taxpayers can repay the distribution over a three-year period with no tax implications.4

Note that individual COVID relief payments paid out by the Treasury are not taxable. However, eligible taxpayers who did not receive the full amount of last year’s two distributions can claim the missing amount as a Recovery Rebate Credit when they file their 2020 taxes this year.5

Content prepared by Kara Stefan Communications.
1 Gordon Gray. American Action Forum. Dec. 22, 2020. “Major Tax Policy Changes in the Consolidated Appropriations Act.” https://www.americanactionforum.org/insight/major-tax-policy-changes-in-the-consolidated-appropriations-act/. Accessed Feb. 4, 2021.
2 Alistair M. Nevius. Journal of Accountancy. Dec. 27, 2020. “Many tax provisions appear in year-end coronavirus relief bill.” https://www.journalofaccountancy.com/news/2020/dec/tax-provisions-in-covid-19-relief-bill-ppp-and-business-meal-deductibility.html. Accessed Feb. 4, 2021.
3 KPMG. Dec. 29, 2020. “United States – President Signs COVID-19 Relief Legislation, Tax Provisions Enacted.” https://home.kpmg/xx/en/home/insights/2020/12/flash-alert-2020-514.html. Accessed Feb. 4, 2021.
4 Robert Bloink and William H. Byrnes. ThinkAdvisor. February 02, 2021. “Year-End Stimulus: What Changed for Retirement Plan Participants.” https://www.thinkadvisor.com/2021/02/02/year-end-stimulus-what-changed-for-retirement-plan-participants/. Accessed Feb. 4, 2021.
5 IRS. Jan. 12, 2021. “IRS ready for the upcoming tax season; last-minute changes to tax laws included in IRS forms and instructions.” https://www.irs.gov/newsroom/irs-ready-for-the-upcoming-tax-season-last-minute-changes-to-tax-laws-included-in-irs-forms-and-instructions. Accessed Feb. 4, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
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Is It Time to Think About Tax-Free Income?

Federal and state governments have spent extraordinary sums in response to the economic toll inflicted by the COVID-19 pandemic. At some point, it is likely that governments will look for ways to increase revenue to compensate for this spending and increase income taxes as a result. That’s why it might be a good time to think about ways to help reduce your taxable income. Here are three potential sources of tax-free income to consider.

Roth IRA

Contributions to a Roth IRA are made with after-tax dollars — you don’t receive a tax deduction for money you put into a Roth IRA. Not only does the Roth IRA offer tax-deferred growth, but qualified Roth distributions including earnings are not subject to income taxation. And the tax-free treatment of distributions applies to beneficiaries who may inherit your Roth IRA.

Municipal Bonds

Municipal, or tax-exempt, bonds are issued by state and local governments to supplement tax revenues and to finance projects. Interest from municipal bonds is usually exempt from federal income tax. Also, municipal bond interest from a given state generally isn’t taxed by governmental bodies within that state, though state and local governments typically do tax interest on bonds issued by other states.

Health Savings Accounts

A health savings account (HSA) lets you set aside tax-deductible or pre-tax dollars to cover health-care and medical costs that your insurance doesn’t pay. HSA funds accumulate tax-deferred, and qualified withdrawals are tax-free. While an HSA is intended to pay for current medical and related expenses, you don’t necessarily have to seek reimbursement now. You can hold your HSA until retirement then reimburses yourself for all the medical expenses you paid over the years with tax-free HSA distributions — money you can use any way you’d like. Be sure to keep receipts for medical expenses you incurred.

Municipal bonds are subject to the uncertainties associated with any fixed-income security, including interest rate risk, credit risk, and reinvestment risk. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Some municipal bond interest could be subject to the federal and state alternative minimum tax. Tax-exempt interest is included in determining if a portion of any Social Security benefit you receive is taxable. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. HSA funds can be withdrawn free of federal income tax and penalties provided the money is spent on qualified health-care expenses. Depending upon the state, HSA contributions and earnings may or may not be subject to state taxes. You cannot establish or contribute to an HSA unless you are enrolled in a high deductible health plan (HDHP). To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet the five-year holding requirement and the distribution must take place after age 59½ or due to the owner’s death, disability, or a first-time home purchase (up to a $ 10,000-lifetime maximum). All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Page


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SECURE Act passed by Congress in 2019

The SECURE Act – What You Need to Know and How It Changes Your Retirement Plans

In the past two years, Congress has passed two pieces of legislation that have made an impact on individuals. The first was the “Tax Cuts and Jobs Act”, the largest tax overhaul of the tax code in 30 years. The second, more recently passed (and effective January 1st, 2020) was the “Setting Every Community Up For Retirement Enhancement” Act or as is now known, the “SECURE” Act.

The SECURE Act brings about significant changes that impact retirement planning and retirement plans (IRA, 401k, etc.). In fact, it causing more sweeping changes than we’ve seen in decades.  And, there are some important things you need to know.

This article focuses primarily on the individual investor or plan participant but there are important considerations for corporate plan sponsors as well, which are not covered here.  Although we don’t have space here to cover everything in the Act, we’ve focused on some of the items that will have the most effect on individual retirement account investors.

New Rules for Retirement

There are a number of new retirement rules the SECURE Act implements:

  1. Elimination of the “stretch” IRA / Retirement account provision – For people passing away in and after 2020, their non-spousal beneficiaries have now lost the ability to “stretch” forced taxable required minimum distributions over their lifetime. They will now be forced to liquidate the beneficiary IRA or other inherited retirement accounts within 10 years.  This does not affect the spouse as a beneficiary and there are some other narrow exclusions to the new rule such as certain minors (till the age of majority) and the disabled (as IRS defined) but check with your advisor for more specifics as to whether any of those exclusions apply to your situation. For most, even if the spouse is the beneficiary of your retirement account, when your spouse is gone, they’re non-spousal beneficiaries will be subject to the new rule. Sooner or later it will affect every retirement account, so plan now to the extent you can. Also if you have a trust involved with your IRA at death, you’ll want to review this arrangement as well since certain “see-through” trust arrangements could be affected.
  2. Contributions to traditional IRA’s post 70.5 – The new law now allows contributions after 70.5 to your IRA as long as you have earned income.
  3. Required Minimum Distribution (RMD) age increase – If you turned 70.5 and were due to take an RMD in 2019, sorry, you will have to continue taking those taxable distributions as originally scheduled. However, if you weren’t 70.5 in 2019 then you now get to defer RMD’s till age 72. Congratulations! The round age will also help clear up the confusion many have as to exactly when the first RMD must be withdrawn and which life expectancy factor age to use.
  4. Qualified Charitable Distribution (QCD) unaffected – This is important to the charitably minded folks out there who are already 70.5 or will be in 2020 and beyond. If you’re already 70.5 the QCD rules don’t change. The law kept the QCD rules intact allowing them to start at 70.5 and satisfy RMD requirements but not count towards income. For those who can defer RMD’s to 72, this is giving you a 1-2 year tax planning or giving opportunity window where IRA distributions may be counted as a charitable contribution but not as an RMD.
  5. Ten-percent early withdrawal change – For those seeking a distribution before 59.5 from a retirement account for a Qualified Birth or Adoption distribution, the typical 10% penalty you would incur doesn’t apply up to $5000 as long as you follow the timing rules for the withdrawal. Get with an advisor for more details on this change.

Non-Retirement Account SECURE Act Tax Benefits

The SECURE Act also makes several tax benefits available that don’t pertain directly to retirement accounts but may have an impact on a retirees income:

  1. Mortgage Insurance premium deduction – Retroactive to 2018 and through 2020.
  2. Medical expense deduction – The AGI threshold has been kept at 7.5% of AGI for 2019 and 2020.
  3. Qualified Disaster Distributions from retirement accounts – If meeting the qualifications in the Act, distributions up to $100,000 would be exempt from the 10% early withdrawal penalty, be treated as distributed evenly over 3 years if desired, be exempt from mandatory withholding requirements and may be repaid within 3 years of the distribution.

To be sure, the SECURE Act will require some adjustment and repositioning of many financial plans. It is important that you visit with a fiduciary advisor and review your financial plan to see how this may affect you, your spouse and most importantly, the beneficiaries of your retirement accounts, as they are the ones that will be most impacted.

If you’ve not done financial planning with a professional in the past, now’s a good time to start. Give us a call or come see us for an initial, no-obligation review so we can help you set Clear Direction for Your Retirement.

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United States White House

“The Secure Act” – Is Congress Coming for Your IRA?

An Opinion piece in the Wall Street Journal the other day detailed “The Secure Act”, a new law being considered in Congress, that has tremendous implications for any person’s retirement plans. We thought you all might find interesting and informative and you can find the original article here (paid Wall Street Journal account required to read the whole thing).

We’ve been tracking the progress of this and similar legislation that may impact your retirement strategy. Below, is our summary of how key aspects of this pending legislation might require changes to your retirement plans.

If this legislation is ultimately signed into law, it will create major shifts in the retirement planning landscape. You should be talking with your financial professional now regarding how you may be affected so you can get ahead of the changes.

Implications for your retirement plans are many:

  1. IRA Required Minimum Distribution start age is pushed from 70.5 to 72.
  2. The current Stretch IRA provision (IRA’s left to non-spousal beneficiaries) is eliminated and only gives heirs up to 10 years to liquidate the IRA’s entire value.
  3. The current spousal beneficiary provision remains unchanged.
  4. Without further Congressional action, current tax rates expire in 2025 and are going up.
  5. Trust planning with IRA’s for heirs will have significant implications to consider.
  6. Tax planning considerations for non-spousal inherited IRA’s will need to be revisited.
  7. College planning for those inheriting IRA’s with college age children will need to be revisited.

If you need help with your retirement strategy, give us a call or come visit with us. We’d love to help you understand how these potential legislative changes may affect you and your heirs now or in the future.

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