Fong Law Group

Highlights of How the Omnibus Bill Will Benefit Older Adults

The Senate and House have cleared the passage of a year-end $1.7 trillion appropriations bill that will benefit older adults on a number of fronts.

The bill, which runs more than 4,000 pages and includes a wide variety of legislation, heads to President Biden next for his signoff.

Here is a breakdown of some of the highlights that relate to supporting older Americans:

Health and Housing

• Opt to age at home – The Money Follows the Person (MFP) Program has been helping older adults age in their own home or a community setting, rather than in nursing homes, since 1972. The newly passed bill extends MFP through September 2027.
   
• Age in place safely – The omnibus bill has also doubled funding for the federal government’s Older Adult Home Modification Program from $15 million to $30 million.
  
  For seniors with limited income, this program covers the cost of simple, low-cost home modifications – such as railings and temporary wheelchair ramps – that help them age in place safely.
   
• Provide for your healthy spouse if you are on Medicaid in a nursing home – Medicaid beneficiaries who must reside in a long-term care facility but have a spouse still living at home will continue to see their healthy spouse protected from poverty.
  
  Known as spousal impoverishment rules, these protections ensure that the healthy spouse receives income while their institutionalized spouse keeps their Medicaid eligibility. These protections, which are adjusted each year, will continue to be in place until September 2027.
   
• Continue to see doctors online – Lawmakers have extended access to telehealth services for Medicare enrollees for another two years.
   
• Find affordable housing with support services – The Housing for the Elderly Program has received a billion-dollar bump in funding as well.
  
  This program seeks to aid seniors with very limited income in securing housing that is within their means while also offering supportive services such as assistance with cooking and cleaning.

Retirement Savings

• Contribute more to retirement – For older workers, the omnibus bill raises what are known as “catch-up” contribution limits for retirement savings. Taxpayers ages 60 to 63 will be allowed to contribute an extra $10,000 to their 401(k) starting in 2025.
   
• Access 401(k) funds for emergencies – If you need to take money out of your 401(k) before reaching age 59½, under certain circumstances you will no longer have to pay the 10 percent penalty fee for withdrawing money early. As of the end of 2023, you will be allowed to withdraw up to $1,000 a year for unforeseen emergencies without incurring a penalty.
   
• Wait longer to withdraw money from your retirement accounts – Previously, you were required to begin withdrawing money from your retirement plan account starting at age 72. This mandatory withdrawal is known as a required minimum distribution (RMD).
  
  As of January 1, 2023, the new bill allows you to hold off until age 73 to take funds from these types of private retirement accounts.

How to Fix a Required Minimum Distribution Mistake

The rules around required minimum distributions from retirement accounts are confusing, and it’s easy to slip up. Fortunately, if you do make a mistake, there are steps you can take to fix the error and possibly avoid a stiff penalty.  

If you have a tax-deferred retirement plan such as a traditional IRA or 401(k), you are required to begin taking distributions once you reach a certain age, with the withdrawn money taxed at your then-current tax rate. If you were age 70 1/2 before the end of 2019, you had to begin taking required minimum distributions (RMDs) in April of the year after you turned 70. But if you were not yet 70 1/2 by the end of 2019, you can wait to take RMDs until age 72. If you miss a withdrawal or take less than you were required to, you must pay a 50 percent excise tax on the amount that should have been distributed but was not.

It can be easy to miss a distribution or not withdraw the correct amount. If you make a mistake, the first step is to quickly correct the mistake and take the correct distribution. If you missed more than one distribution – either from multiple years or because you withdrew from several different accounts in the same year -- it is better to take each distribution separately and for exactly the amount of the shortfall. 

The next step is to file IRS form 5329. If you have more than one missed distribution, you can include them on one form as long as they all occurred in the same year. If you missed distributions in multiple years, you need to file a separate form for each year. And married couples who both miss a distribution need to each file their own forms. The form can be tricky, so follow the instructions closely to make sure you correctly fill it out. 

In addition to completing form 5329, you should submit a letter, explaining why you missed the distribution and informing the IRS that you have now made the correct distributions. There is no clear definition of what the IRS will consider a reasonable explanation for missing a distribution. If the IRS does not waive the penalty, it will send you a notice.

For more detailed information on how to correct an RMD mistake, click here.

A Final Retirement Account Distribution Must Still Be Made After Death 最後的退休賬戶分配仍必須在去世後進行(中英對照)

Federal law requires that beginning on April 1 of the year after you reach age 70 1/2, you must beginwithdrawing a minimum amount from your non-Roth individual retirement account (IRA) or 401(k) accounts. These withdrawals are called required minimum distributions (RMDs).

But what if you die after age 70 1/2 and before all the account funds have been distributed? In the eyes of the law, death is no excuse not to take RMDs from an IRA or 401(k). Your heirs must take the final RMD before they can take control of the account.  

Congress created the rules governing the minimum distribution of retirement plan funds to encourage saving for retirement and to allow retirement assets to build up tax-free during the plan owner's working years. But lawmakers built in provisions so the money wouldn’t simply keep accumulating tax-free forever. The funds you withdraw are treated as taxable income in the year you take the distribution. If you don’t start taking the RMDs from your retirement accounts and pay taxes on the withdrawals, you will face a 50 percent penalty on what should have been withdrawn but wasn’t.

The rules for inheriting an IRA as a spouse are different than the rules for a non-spouse beneficiary, but regardless of who is inheriting the IRA, the heir must take the RMD for the year the account owner died. The full RMD must be taken by December 31 in the year the account owner died, even if he or she died at the beginning of the year. To take the RMD, beneficiaries must contact the custodian of the account and submit a death certificate. If the account owner died before he or she was required to begin distributions, then the beneficiaries do not need to take an RMD. 

The money from the RMD will go directly to the beneficiary listed on the account, not the estate. That means it will be taxable income for the beneficiary. If there is more than one beneficiary, it will be split evenly. 

To find out the best way to deal with an inherited IRA, contact an elder law attorney. 

聯邦法律規定在您70 歲半之後的一年的4月1日開始，您必須從您的Roth非個人退休賬戶（IRA）或401（k）賬戶中開始提取最低金額。這些提取稱為最低的必須提取額（RMDs）。

但是，如果你在70歲半過世,而過世時帳戶資金還沒被提取, 那怎麼辦？在法律的眼中，死亡不是不從IRA或401（k）中提取RMD的藉口。您的繼承人必須先提取最後的RMD才能控制該帳戶。

國會立例去管理退休計劃資金最低提取的規則，以鼓勵為退休而儲蓄，並允許退休資產在計劃擁有人的工作年間免稅。但立法者建立了條款，所以累積這筆錢不會永遠地免稅。您提取的資金在您進行分配的那一年被視為應稅收入。如果您沒有從退休賬戶中開始使用RMD並對提款付稅，那麼您應該提取而沒有提取的金額將面臨5成的罰款。

作為配偶去繼承IRA的規則與非配偶受益人的規則不同，但無論由誰去繼承IRA，繼承人必須在賬戶擁有人去世的那一年提取RMD。整個RMD必須在帳戶擁有人去世的那一年的12月31日之前提取，即使他是在年初去世。要提取RMD，受益人必須聯繫帳戶的管理人並提交死亡證明。如果帳戶擁有人在他需要提取之前去世，那麼受益人不需要提取RMD。

RMD的資金將直接轉給賬戶上列出的受益人，而不是遺產。即是說這將是受益人的應稅收入。如果有一個以上的受益人，它將被均分。

要找到最佳的處理繼承IRA的方法，請聯繫老人法律師。

Making an IRA Part of the Estate Plan

“You’re hoping to leave your loved ones a nice legacy and something that can enhance their financial security or help them achieve special goals. Have you considered how your individual retirement account (IRA) fits into your estate plans?”

Most people use their IRAs (Individual Retirement Accounts) for retirement income. However, a lucky group find themselves not needing the money from their IRA accounts. Instead, the assets become part of a legacy that they leave to heirs. That is why most IRA accounts include the name of a beneficiary who could inherit these accounts, when the owner passes away, reports the Oakdale Leader in the article “Leaving An IRA As An Inheritance.”

If no beneficiary is named, things can get complicated for both the estate and the heirs. If the IRA has a named beneficiary, but the will names someone else to receive the IRA, the beneficiary named in the IRA is the one who receives the asset. The named beneficiary in any account and especially an IRA, supersedes the will, in almost every instance.

Anytime there is a significant event, often called a “trigger” event, like a divorce, marriage or birth, the estate plan and all accounts with named beneficiaries should be reviewed. This is to ensure that the assets go where the owner wants them, and not to an unintended heir, like an ex-spouse.

There are special rules for spouses, where IRAs are concerned. Married couples typically name each other as beneficiaries on their IRAs. A surviving spouse has certain decisions to make, when inheriting an IRA. The IRA may be rolled over into a new or existing IRA in the spouse’s own name. Taking this route depends upon the age of the spouse and the need for the money.

Another option is to convert the inherited traditional IRA into a Roth IRA. However, taxes must be paid on the conversion. It is also possible to transfer the IRA assets into an inherited IRA. An estate planning attorney will be able to explain all the options and how they will work with the surviving spouse’s estate plan.

To maximize the growth of the IRA, children or grandchildren can be named as IRA beneficiaries. They will need to start taking annual Required Minimum Distributions (RMDs) immediately, and the distributions will be taxable. However, the amount of the RMD will be based on their anticipated lifetimes, so the taxable distributions will be relatively small. The money in the account will have many years to grow.

When children or grandchildren are named as contingent beneficiaries, a surviving spouse has the option to disclaim the IRA, which allows the children or grandchildren to inherit the IRA and enjoy the tax-free years of growth.

Many advisors counsel against naming an estate as a beneficiary, because it helps avoid probate and strict distribution time limits.

Reference: Oakdale Leader (February 19, 2019) “Leaving An IRA As An Inheritance”

Yes, You Have to Pay Taxes on Retirement Account Withdrawals—and On Time

“I had never worked with a financial advisor, so I didn’t really understand that there would be a specific age that would come along, regardless of whether or not I was working, and bang, I would have to withdraw this money, whether or not I needed it,” he says.

Once you celebrate your 70^th birthday, you may start seeing a lot of notices in the mail from financial institutions about taking withdrawals from IRAs and other kinds of retirement accounts. Those letters are going to arrive, even if you are still working and have no plans to retire, says Money, in an article titled “Don’t Miss This Key Tax Deadline.”

The problem is, the IRS doesn’t care whether you are working or want to start taking withdrawals. It also does not care if you want that money to keep growing tax free. The agreement you made back when you started putting money into those accounts, was that you could contribute pre-tax dollars and deferred paying income tax on that money and any earnings. However, once you turn 70½, Uncle Sam wants his share.

Starting the year that you turn 70½, Required Minimum Distributions or RMDs begin, and you must pay ordinary income taxes on it. The penalty is expensive: you’ll have to pay the IRS half of what you should have withdrawn, so you don’t want to miss this deadline.

A recent survey from Nationwide showed that only 13% of people who are 65 and still working, were able to identify when they will need to start taking RMDs. The RMD is a percentage of your total assets, based on your age and life expectancy. Let’s look at these two general examples: say you are 70½ this year, and you have $200,000 in assets–your RMD is $7,300. If you are 76 and have the same asset value, then you owe the IRS $9,100. Your tax liability for RMDs should be calculated with the help of your estate planning attorney and your accountant.

How you take these distributions could have a big impact on your tax bill. For many people, the RMD bumps them into a higher tax bracket, when they are combined with other retirement income sources. Another question to address is: how will the distribution impact your Social Security benefit?

By the time you start getting those notices in the mail, you should have an idea of what your retirement income will be and how to make the RMDs work within your budget. What is the biggest problem that people run into? They don’t know about these required distributions, or their tax liability, and are suddenly faced with a penalty on top of a tax bill. It’s not a happy surprise.

Roth accounts offer considerable flexibility, since the money you withdraw is post-tax. They are not subject to RMD rules, while the owner is living. RMD rules for Roth 401(k) accounts do apply.

The only way to completely avoid RMD taxes, is to donate the RMD to a qualifying non-profit institution. This is a way to avoid taking the RMD, if you don’t need the income. You will avoid paying any taxes on it. There is a $100,000 annual limit on this generous strategy.

Another strategy if you don’t need the proceeds from the RMD: use the money to open a 529 college fund for a child or grandchild and fund that account. You’ll still have to pay taxes on the RMD, but the college savings account will grow tax free.

The more you can control your RMDs, which means advance planning, the better. This is something that should be integrated with your entire estate plan, which has (or should have) a tax planning component.

Reference: Money (January/February 2019) “Don’t Miss This Key Tax Deadline”

Don’t Destroy Inherited IRA with Bonehead Blunder

“You wouldn't trust your toddler with a pile of cash, right? Well, this estate-planning technique may allow you to safely pass your IRA on to future generations—if you do it right.”

Some of the biggest blunders in IRA distributions come to those who inherit these accounts. On the bright side, if handled correctly, you can structure the distribution, so your children or grandchildren reap the benefits for many years, says CNBC in the article “Leaving an IRA to a loved one? How to avoid a tax bomb.”

Naming a trust as an IRA beneficiary is a good way to protect large IRAs, since it provides some means of control. By naming a trust, you can protect heirs who are minors, vulnerable to creditors, not able to handle large sums of money or disabled. Trusts only need $12,750 of taxable income in 2019 to be subject to the top tax rate of 37%.

If you don’t structure the trust right, you could accelerate the liquidation of the IRA at warp speed.

Most people think of their spouse, when it comes to naming a beneficiary for an IRA. Unless your spouse needs the funds, it’s best to name the next generation. What are the pitfalls? Not all IRA custodians allow you to list a trust on the beneficiary form. The tax code has very specific conditions, when trusts are the beneficiaries of retirement accounts. If you fail to follow the rules, your heirs could face huge tax bills. For a trust to be viable as a designated beneficiary, it must meet a four-step test:

It must be valid under your state’s laws.

It must be an irrevocable trust, or one that will become irrevocable upon your death.

Beneficiaries must be identifiable from the trust document.

The IRA custodian or trust administrator must have received a copy of the trust by October 31 of the year after the death of the IRA’s owner.

The beneficiaries must be people, not charities and not your estate. If your beneficiaries are not people, then your IRA may not have a designated beneficiary. In that case, your heirs can’t stretch the IRA by taking required minimum distributions, based on the longer life expectancy of a child or a grandchild.

Worse—if your trust fails to meet the test, it is subject to the same rules as if there was no designated beneficiary at all. That means it’ll be depleted faster than you may have wished. If you die before you start taking RMDs (70½) then the IRA must be distributed within five years after death. If you die after you start taking RMDs, then distributions pay out over what would have been your life expectancy.

Speak with an estate planning attorney about the type of trust that will work best. There are two to chose from: a conduit trust, which distributes the RMDs directly to the beneficiary, or a discretionary trust, if you’re worried about a child who can’t manage money or who may be indebted to creditors. Note that RMDs are taxable income to the beneficiary when they receive it, but if the distribution is held in the trust, then the trust owes the taxes.

Reference: CNBC (Dec. 9, 2018) “Leaving an IRA to a loved one? How to avoid a tax bomb”

A Completely Different View of 401(k)s and Retirement Savings

“A 401(k) plan ensures that you have money to spend during your retirement years. However, there are reasons why a 401(k) stinks.”

It’s almost always enlightening to hear from a different perspective, even in finance. This article from Born2Invest, “Retirement planning: The downsides of your 401(k),” takes a somewhat contrarian view of retirement accounts in general and the use of 401(k)s in particular. We may not agree. However, it’s worth the read.

The article notes that historically, retirement as a concept is relatively new. People just worked as long as they were able to. In 1881, Otto Van Bismarck petitioned for the creation of a government system to support the elderly and the concept of a social security system was created. Their retirement age was 70—the same as life expectancy. In 1935, the American Social Security system was created. For a few generations we worked, we saved, we got pensions from employers and when we celebrated our 65^th birthday, we retired.

That world has passed. The Revenue Act of 1978 created the 401(k) and defined benefit plans went away as corporations passed the burden of saving and investing for retirement to employees. There is now a huge industry of employer-sponsored, employee-funded retirement plans with assets of more than $7.7 trillion. IRAs hold more than $8.6 trillion.

Why does that stink? One of the benefits marketed by 401(k) providers is that they allow owners to defer income and taxes. However, “defer” doesn’t mean they are tax free. You’ll pay taxes when you take the money out. To be sure that you do, there are Required Minimum Distributions (RMDs). You’re taxed not just on the distributions but also on the investment gains.

The traditional thinking is that you’re going to retire, your income will decrease and so you’ll be in a lower tax bracket. But will it? If your combined income from Social Security, pensions and RMDs send you into a higher tax bracket, you may be paying more in taxes. This is especially true, if you have lost the deductions: kids growing up, no mortgage and no pre-tax contributions.

Your retirement funds are supposed to be just for retirement. However, sometimes there are bumps along the way and, if you have no other assets, that’s where you’ll go at a high price.

401(k)s have limited investment options and you’re typically limited to mutual funds and sometimes to Exchange-Traded Funds (EFTs).

Those retirement plans are not free. A 401(k) has high administrative costs and underlying investments have fund fees, based on the companies and their management activity.

Is the 401(k) the best plan for you? The article says to consider your options, so you are not just following the herd. Workplace related retirement plans could be the best option, but you should be aware of the costs, taxes and restrictions.

Reference: Born2Invest.com (Sep. 13, 2018) “Retirement planning: The downsides of your 401(k)”