Retirement Plans & the New SECURE Act - PowerPoint Presentation

1. Retirement Plans & the New SECURE ActKershaw K Khumbatta PLLC1455 Highway 6 South, Suite ASugar Land, Texas 77478Tel: 281-313-8006

2. SECURE ActSetting Every Community Up for Retirement Enhancement Act of 2019.The Act became law on December 20, 2019.The SECURE Act made major changes to the RMD Rules.

3. What is an Individual Retirement Accounts (IRA)It is a trust or custodial account created by a document which is written and set up in the USA. It is for the benefit of an individual or his beneficiaries.The IRA document needs to have the following requirements:The trustee or custodian has to be a bankContributions are only to the limit (under 50 years $6,000 and over 50 years $7,000) or to the limit of your annual compensation.Contributions can only be in CashThe individual interest in the IRA belongs to the individual and cannot be rescinded IRA assets should not be comingled with other propertyThe Required Minimum Distributions Rules apply Setting up an IRA you go to a bank or a financial institution and they can set up for you. Types of IRAs: Traditional IRA and Roth IRAGenerally taxpayers who are not covered by an employer retirement plan during any part of the year can deduct contributions to a Traditional IRA for the year, up to the contributions limit.

4. What is a Roth IRAWhen Congress passed the Taxpayer Relief Act of 1997.This legislation set in signal one of the largest tax-reduction and tax-credit set of benefits in US history. Among the sweeping tax reforms of this legislation was the creation of the Roth IRA, this IRA is a different type of individual retirement account than had previously existed. It was named for the late U.S. Senator William V. Roth Jr. of Delaware, who sponsored the legislation that created Roth IRA.Roth IRA account gave taxpayers the option of investing already-taxed income that they could withdraw tax-free.

5. Major Differences between Roth and Traditional IRARoth TraditionalAre Contributions DeductibleNoYes (*)Are Distributions TaxableNoYes in excess of basisHow is Basis allocated to distributionBasis FirstIn Proportion to total basisCan you contribute after age 70 ½ in 2019 (#)YesNoAre distributions required during owners life timeNoYes starting at age 70 1/2 (*)but is phased out if having an employer retirement plan(#) if you reached 70 ½ in 2020 or later

6. Deducting IRA Contributions when Covered by Employer PlansFiling StatusModified AGIDeductionSingle or HOH$64,000 or LessFull$64,001 - $73,999Partial$74,000 or MoreNoneMFJ (covered spouse) if both are covered by an employer retirement account OR a Qualified Widow or Widower$103,000 or LessFull$103,001-$122,999Partial$123,000 or MoreNoneMFJ (non-covered spouse) if only one spouse is covered by an employer retirement account $193,000 or LessFull$193,001-$202,999Partial$203,000 or MoreNoneMFS (covered or non-covered spouse)Less than $10,000Partial$10,000 or MoreNone

7. Nondeductible IRA ContributionsIf contributions are made and they are reduced or eliminated, they can be treated as nondeductible IRA contributions.The non deductible contributions need to be reported to the IRS on Form 8606.Better to have a separate bank account for deductible IRA and another bank account for nondeductible IRA, for ease.

8. Penalty on Excess ContributionsExcess contributions is the amount contributed to a Traditional IRA for the year that is more than the smaller of :$6,000 or $7,000 if over 50 years ORCompensation for the year, i.e. you made less than $6,000 or $7,000 for the year.A 6% penalty on excess contribution for each year.Can be withdrawn before the tax is filed including extensions.

9. Prohibited TransactionsGenerally, any improper use of an IRA account by the account holder, the beneficiary or their spouses or family is a prohibited transaction.Prohibited Transactions (severe penalties apply) are:Borrowing money from it (okay for 60 days)Selling property to itReceiving unreasonable compensation for managing the moneyUsing it as a security for a loanBuying property for personal use, by using IRA funds

10. When can you withdraw money from your IRA (RMD) & what tax you payIf withdrawn before 59 ½ years, then there is a 10% penalty, no penalty after 70 ½ years. If you reach 70 ½ in 2020 or later you must take your RMD by April 1 of the year you reach 72.Distributions from an IRA are taxed as ordinary income in the year you receive it, so you pay tax based upon the tax bracket you are in when you withdraw.When the participant reaches 70 ½, OR 72 it is mandatory to take a withdrawal from the Traditional IRA, which is called Required Minimum Distribution (RMD).The participant can take the RMD either periodically or as a lump sum distribution.

11. New Rules for Required Minimum DistributionsIf you reach the age of 70 ½ in 2020 or later you must take your RMD by April 1 of the year you reach 72.If you reach the age of 70 ½ in 2019 you must start taking RMD, by April 1,2020. (Confusing). If you turned 70 ½ in 2019, you can delay your RMD until April 1, 2020. This extra bonus time works for the first year only, and thereafter you have to take distribution by December 31.Example: Jeff turns 72 on Aug 20, 2020, he has until April 1, 2021 to take his first RMD, which is based upon his 2019 year end balance. If Jeff waits until April 1, 2021 to take his RMD, he will have to take an additional RMD by December 31, 2021 based upon his 2020 year end balance. (so he will have to take 2 distributions in 2021)

12. Required Minimum Distribution DeadlineIf you do not take any distribution you will have to pay 50% tax on the amount not withdrawn as required. ORIf you do not take large enough distribution you will have to pay 50% tax on the amount not withdrawn as required.You can withdraw more than the required minimum amount.

13. What is Required Minimum Distribution (RMD)RMD generally are the amounts that a retirement plan account owner must withdraw annually starting with the year that the owner reaches 72 (70 ½ if you reach 70 ½ before Jan 1, 2020).When an IRA owner or retirement plan owner dies before Jan 1, 2020 and before the RMD have begun the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either:Within 5 years of the owner’s death OROver the life of the beneficiary starting no later than one year following the owner’s death.When an IRA owner or retirement plan owner dies after December 31, 2019, the SECURE Act requires regardless of the participant reaching the age of 72.Entire balance of the participant’s account be distributed within 10 years.There is an exception for a surviving spouse, a child you has not reached the age of majority, a disabled or chronically ill person or a person not more than 10 years younger than the IRA account onwer.

14. Salient Points of RMDThe RMD rules apply to all employer sponsored plans,401(k) , 403(b), 457(b), IRA, SEPs, SARSEPs and Simple IRA. The RMD rules apply to Roth 401(k) accounts. But RMD rules do not apply to Roth 401(k) while the owner is alive.Generally RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590-B.The IRA owner must calculate the RMD separately for each IRA that they own, but can withdraw the total form one or more of the IRAs, but for a 401(k) the RMD has to be taken separately from each of those plan accounts.The IRA custodian or retirement plan administrator may calculate the RMD, but the account holder is ultimately responsible for calculating it.You cannot use the distribution of RMD for one year be applied to the RMD for a future year.

15. Salient Point of RMD (contd)RMD is taxed at your income tax rate. If the RMD is a return of your basis or a qualified distribution from Roth IRA, it is tax free.RMD cannot be rolled over into another tax deferred account.Employer must continue contributions for an employee, even if they are receiving RMDs, and do salary deferrals if the plan permits them.

16. Important Points about your IRANon working spouse can contribute towards a Traditional or Roth IRA, if you are filing a joint tax return.If you are a first time home buyer, or pay for certain qualified higher education expenses you can withdraw from the IRA accounts without any penalty. To be eligible to use this distribution for education, the expenses must be for yourself, a spouse, child or grandchild. With funds from an IRA, a parent or student can pay for books, tuition and other qualified education expenses without a penalty. But the student must be enrolled more than half-time at an eligible institution, as defined by the Department of Education.Supreme Court has ruled that creditors may not seize IRA assets in bankruptcy proceedings.

17. Selecting a Retirement Plan There is no single method of selecting the right employer retirement plan since many factors can come into play:Provide retirement income for employeesMaximize employer’s tax deductionsIncrease employee incentiveControl cost for providing the retirement benefits (actuarial costs)Maximize contributions or benefits to highly compensated or key employeesAttract and retain valuable employeesAllow employees pre-tax salary deferralsMaintain flexibility in making contributionsMinimize costs of adopting planMinimize costs of administering planMaintain competitive employee benefit

18. SEP or Simplified Employee Pension PlanSEP or Simplified Employee Pension Plan is a written plan which allows the employer to make contributions to IRAs established by or on behalf of each qualifying employee.Any business can set it up, complete Form 5305-SEP.The deadline to setup this plan is the due date of the returns including extensions.Employee 21 years, must have worked for 3 out of the last 5 years with the employer and has earned $600 per yearNo employee contribution only employer, but discretionaryMaximum amount of contribution is $56,000 or 25% of compensation (max compensation of $280,000) which ever is lower.The employee is immediately vestedRoth contributions are not allowed

19. Simple IRASIMPLE IRA Savings incentive match plan for employees. It is a written salary reduction arrangement under which an eligible employee may elect to have the employer contribute part of his or her paycheck into an IRA. Can be setup by employer have less than 100 employees, must have earned at least $5,000 yearly.Need to be setup by October 1 of the year in which the employer wants to set it up.All employees are eligible if they have earned greater than $5,000 in any 2 prior years and are expected to earn at least $5,000 in current year.Employees can contribute into the plan being the lesser of 100% of their compensation or $13,000 ($16,000 if 50 or older at year end)Employer must either match the contributions of the employee up to 3% of contribution or make a non-elective contribution (The contribution is not based on salary reduction contributions made by the employee), up to 2% of compensationThe employees are immediately vested.Roth contributions are not allowed

20. Solo (One-Person) 401(k)Solo (or one person) 401(k) is a 401(k) plan for self-employed individuals and small businesses with no employees other than the owner (and spouse). The deadline to establish is by the end of the yearEmployees (owner & spouse) have to be 21 years or older and have at least one year of service.Employees are allowed to contribute the lesser of 100% compensation or $19,000 for 2019 ($25,000 is 50 years or older at year end)Employer contributions are discretionaryThe maximum contribution to an employee account is the lesser of $56,000 or 25% of compensation ($280,000)Employee gets 100% vested immediatelyEmployer contributions can be vested over time (but no more than 6 years)If the plan allows then you can do Roth contributions

21. Self Employed Individuals Maximum Plan Contributions at Various Levels of EarningsScenario SE Income AgeType of Plan Contributions Elective Catch up Employer Total Deferral Contributions Contributions Contributions 1 $ 280,000 Over 50Solo 401(k) $ 19,000 $ 6,000 $ 35,000 $ 60,000 SEP $ - $ - $ 56,000 $ 56,000 SIMPLE IRA $ 13,000 $ 3,000 $ 8,400 $ 24,4002 $ 275,000 Under 50Solo 401(k) $ 19,000 $ - $ 35,000 $ 54,000 SEP $ - $ - $ 56,000 $ 56,000SIMPLE IRA $ 13,000 $ - $ 8,400 $ 21,400 3 $ 100,000 Over 50Solo 401(k) $ 19,000 $ 6,000 $ 18,587 $ 43,587 SEP $ - $ - $ 18,587 $ 18,587 SIMPLE IRA $ 13,000 $ 3,000 $ 2,770 $ 18,270 4 $ 100,000 Under 50Solo 401(k) $ 19,000 $ - $ 18,587 $ 37,587 SEP $ - $ - $ 18,587 $ 18,587 SIMPLE IRA $ 13,000 $ - $ 2,770 $ 15,770 5 $ 50,000 Over 50Solo 401(k) $ 19,000 $ 6,000 $ 9,294 $ 34,294 SEP $ - $ - $ 9,294 $ 9,294 SIMPLE IRA $ 13,000 $ 3,000 $ 1,385 $ 17,385 6 $ 50,000 Under 50Solo 401(k) $ 19,000 $ - $ 9,294 $ 28,294 SEP $ - $ - $ 9,294 $ 9,294 SIMPLE IRA $ 13,000 $ - $ 1,385 $ 14,385

22. Other Qualified PlansA Qualified Plan is a plan established by an employer under IRS code section 401 to provide retirement benefits to the employeesQualified Plans are of two types:Defined Contribution PlansProfit Sharing Plan (including 401(k) plansStock bonus PlanDefined Benefit Plans

23. Characteristics of a Qualified PlanPlan must meet certain requirements of the IRC code and the ERISA code to be afforded the special tax-favored treatmentEmployer contributions are tax deductibleEmployees do not recognize any tax until the contributions and earnings are received as a distribution form the planCan be set up by most of the businessesEmployer can claim a tax credit for part of setting up the qualified plan

24. Rollover It is a tax free distribution of cash and other assets from one retirement plan that is contributed to another retirement plan, should be a trustee to trustee transfer.Funds can be rolled over from a traditional IRA or a qualified plan to a Roth IRA, this triggers a taxable event.To avoid taxation on the receipt of the distribution it must be rolled over by the 60th day after the day it is received.