by Daniel Kittell | Accounting News, Business Consulting, News, Tax Planning, Tax Planning - Individual
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for employers on retirement plans, making it easier for employers to offer 401(k) plans and for employees to take part in them. Here’s how.
Multiple Employer Plans
Known as MEPs, multiple employer plans permit businesses to band together to offer employees a defined contribution plan such as a 401(k) or SIMPLE IRA, effectively allowing workers access to the same low-cost plans offered by large employers. While MEPs existed before the SECURE Act, here’s how they are now easier to establish and maintain.
- The “one bad apple rule”, where one employer’s failure to comply jeopardized the entire plan, was done away with.
- The “common nexus” requirement, which restricted the MEP option to small business employers who operated either in the same industry or same geographic location, was eliminated, permitting an “open MEP” that can be administered by a pooled plan provider (typically a financial services firm).
- MEPs with fewer than 1,000 participants (and no more than 100 participants from a single employer) are excluded from a potentially expensive audit requirement.
- Small business employers are also eligible for new tax credits for offering retirement savings options to employees.
Changes to Safe Harbor Plans
A provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans, which are 401(k) plans with an employer match that allows for avoidance of most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Flexibility offered by the SECURE Act includes:
- Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
- Removing the notice requirement for nonelective contributions. (The notice requirement is still applicable, however, for plans that implement the safe harbor match.)
- Whereas pre-SECURE Act, switching to a safe harbor plan had to be done before the start of the plan year, employers are now allowed to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are approved if (1) a nonelective contribution of at least 4% of compensation is granted for all eligible employees for that year, and (2) the plan in amended by the close of the following plan year.
Automatic Enrollment Credit
The SECURE Act added an incentive for small businesses to feature automatic enrollment in their plans by allowing businesses with fewer than 100 employees to qualify for a $500 per year tax credit when they create a new plan that includes automatic enrollment. Business can also take advantage of this by converting an existing plan to one with an automatic enrollment. The tax credit is available for three years following the year the plan automatically begins enrolling participants.
Part-Time Employee Participation
Previously, employers could exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in January of 2021, the SECURE Act requires employers to include employees who work at least 500 hours in three consecutive years. This means that in order to qualify under this rule, employees would need to meet the 500-hour requirement for three years starting in 2021 in order to become eligible in 2024.
Choosing the Right Plan for Your Business
- Research 401(k) plan options for your business, keeping in mind that retirement plans can be customized to meet the needs of you and your employees.
- Carefully read through costs and fees of each plan. Recordkeeping fees, transaction fees, and investment fees are some to be mindful of, and these fees might increase if you add more employees and the plan grows (i.e. low-cost plans upfront might not be the best plan for your business in the long term.)
- Look for a 401(k) plan that presents a variety of investment opportunities for employees in terms of stocks, bonds, broad-based international exposure, and emerging markets.
Work with a financial expert who can help you establish and oversee a 401(k) plan. These professionals can include third-party administrators, recordkeepers, and investment advisors and managers.
by Pete McAllister | Accounting News, COVID-19, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress at the end of March provides direct economic assistance to Americans during the COVID-19 pandemic. In the bill, certain provisions allow people to withdraw from their retirement accounts, including their 401(k)s and IRAs, without the usual early withdrawal penalty. Individuals must have been directly affected by coronavirus – through personal, spousal, or dependent diagnosis or furloughed, laid off, or reduced hours from their job to be eligible for the fee-free withdrawals.
While pulling from retirement funds seems like a simple and fast fix, it may not be the best option based on an individual’s circumstances. Those who stand to suffer the most amid the pandemic are those who are nearing retirement and those already in retirement. The unexpected ups and downs, current unemployment, and new potential health costs in this unprecedented time leave many Americans wondering how they’ll be able to retire comfortably in the current economic climate.
Consider these Options to Counteract the Effects of COVID-19 on Retirement Funds
Keep Current Costs Low
Take a look at current expenses and determine if anything can be eliminated or reduced. Any unused subscriptions? Are you paying for the right amount of insurance? Consider shopping around for lower rates. Can you negotiate any current bills – cell phone, credit cards, internet, anything with an interest rate, even your cable? Hold off on any major home or equipment upgrades and work with what you already have before adding on another expense.
Use Your Home
Assess your risks for taking out a second mortgage or a reverse mortgage. If your mortgage is already paid off, look into home equity loan options. A cash-out refinance may also be available if you’re still paying the mortgage. Over one-third of Americans have their wealth tied up in their homes, so it may be worth it to see if downsizing your home is an option. If so, it might be possible to pay for your smaller home in cash and use the remaining proceeds from the sale of your old for any outstanding debts or liabilities as you near retirement. The location of your home should also be considered – the cost of living can vary significantly from state to state, so moving to a new state or country may bring you more bang for your buck.
Plan for the Long-Term
Health care and long-term care can be an extreme cost for senior citizens. Assisted living and nursing home facilities usually top $60k+ for just one year. Long-term care insurance is costly but can help prepare you and your loved ones to pay the necessary costs. With Americans living longer each year, it’s worth it to plan on trying to stretch your retirement savings to last until age 90. Calculate how much you (and/or a spouse) would need with the assumption you’ll live to be 90. It’s also worth looking at final expense insurance, which could help cover final expenses at the end of your life. Planning for the event in advance can take the financial stress off family members left behind, whether it’s through final expense insurance or setting up a savings account with the express purpose of paying for any final expenses.
While we’re in a global pandemic, everything isn’t all doom and gloom. COVID-19 has hit the country, and our bank accounts hard, but people will bounce back after this economic crisis – much like investors after other recessions in our nation’s history.
by Daniel Kittell | Accounting News, CPA, IRS, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.
Evaluate Your Debt
There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.
Consider Your Emergency Fund
Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.
Fund Your 401(k)
This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.
Open a Roth IRA
If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.
Invest in Stocks
Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.
Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.
by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, Healthcare, News, Retirement, Tax Planning - Individual, Tax Preparation - Individual
As the clock winds down to the end of the year, there are a few last-minute money moves to make in order to lower your tax bill.
Maximize Your 401(k) and HSA Contributions
While tax deductible contributions can be made to traditional and Roth IRA accounts until April 15 of 2020, the deadline for 401(k)s and HSA accounts is December 31 of this year. You can contribute up to $19,000 to a 401(k), 403(b), most 457 plans, and federal Thrift Savings Plans (plus $6,000 in catch-up contributions for those who are 50 or older). As for HSA accounts, the maximum contribution for 2019 is $3,500 for individuals and $7,000 for family coverage. And if you’re 55 or older you can contribute an additional $1,000.
Start Thinking About Retirement Contributions for 2020
Retirement contributions to 401(k)s have increased for 2020. Individuals can contribute $19,500 next year, and those 50 or older can contribute an additional $6,500. If you prefer to spread out your contributions evenly throughout the year, you’ll need to adjust your monthly contribution amounts by January.
Take Advantage of Your Flexible Spending Account
Funds in a flexible spending account revert back to the employer if not spent within the calendar year. Some companies might provide a grace period extending into the new year, but others end reimbursements on December 31.
Prevent Taxes on an RMD with Charitable Donations
After seniors reach age 70 ½ they must take a required minimum distribution each year from their retirement accounts (an exception to this rule is a Roth IRA account). Seniors who aren’t dependent on this money for living expenses should consider having it sent directly from the retirement account to a charity as a qualified charitable distribution, effectively preventing the money from becoming taxable income.
Consider a Roth Conversion
Because withdrawals from traditional IRAs are taxed in retirement while distributions from Roth IRAs are tax-free, you might think about converting some funds from a traditional IRA to a Roth IRA. Just be sure this move doesn’t tip you into the next tax bracket. You’ll need to pay taxes on the initial conversion, but the money will then grow tax-free in the Roth IRA.
Take Stock of Losses
Sell any losses in stocks for a deduction of up to $3,000, but be aware that purchasing the same or a substantially similar stock within 30 days of the sale would violate the wash-sale rule. If that happens your capital loss would be deferred until you sell the new shares.
Meet with a Tax Advisor
If you’re unsure whether or not you’re ending the year in a favorable tax bracket, check in with an advisor who can identify actionable steps to reduce taxable income through retirement contributions or itemized deductions.
by Pete McAllister | Accounting News, Bookkeeping, Business Consulting, IRS, News, Professional Services, Retirement, Tax, Tax Planning
With additional guidance and regulations released consistently since President Trump signed the Tax Cuts and Jobs Act of 2017 into law, one thing remains clear: strategic tax planning is key to lowering a business’s total tax liability. Read on for some moves on lowering your 2019 business tax bill.
Establish Tax-Favored Retirement Plan
Current tax rules allow for significant deductible contributions, so if your business doesn’t already have a retirement plan in place, it’s worth considering. Small business retirement plan options include 401(k), SEP-IRA, SIMPLE-IRA, and the defined benefit pension plan. Some of these plans can be established up until December 31 and allow for a deductible contribution for the 2019 tax year, except for the SEP-IRA and SIMPLE-IRA, which mandate a set-up deadline of October in order to make a contribution for the same year.
Review Your Reports
The end of the year is typically a time for businesses to begin goal setting for the next year, so it’s crucial to have a firm grasp on how your business performed financially this year. Make sure your books are up to date and accurate so you have a clear picture before diving into next year’s plan.
Defer Income If It Makes Sense
Depending on where your income level is, you can potentially cut your tax bill by postponing any end-of-the-year income until January 1 or later. Ask your accountant if shifting receivable income to the new year makes sense for your business.
Purchase Business Essentials to Take Advantage of Deductions
Upgrade equipment and furniture, stock up on office supplies, take care of repairs, and make vendor payments in advance in order to maximize deductions. And thanks to the TCJA, you can claim 100% bonus depreciation for qualified asset additions that were acquired and put in place in 2019.
Make Charitable Contributions
Tis the season for giving…and claiming a deduction for the fair market value of your donations. In addition to money, think outside the box and contact a program that sponsors families for the holidays. They often need food, bedding, toys, cookware, and clothing. It’s a great way for employees to feel like they’re making a difference too. Just don’t forget to get the necessary documentation and receipts to keep with your records.
Start Preparing for Next Year
If you put these tips into action, you’ll be better prepared at this time next year. For instance, you’ll already have a retirement plan in place. By going through the process of tax preparation this year, you have the opportunity to create systems for organization that will expedite the process next year.
