Fong Law Group

New year, new tax updates. What you need to know for 2020

KEY POINTS

• Put up to $19,500 in your workplace 401(k) plan, plus another $6,500 if you’re 50 and over in 2020. This also lowers your taxable income.
• The standard deduction for single filers will be $12,400. It rises to $24,800 for married couples filing jointly.
• Giving away wealthy? An individual can transfer up to $11.58 million free of estate and gift taxes in 2020.

Standard Deduction

Pay attention to your standard deduction for the 2020 tax year.  The IRS has bumped it to $12,400 for singles, up from $12,200 in the prior year. 

The standard deduction for married joint filers will be $24,800 up from $24,400 in 2019. 

Workplace Retirement Savings

Resolve to save a few extra dollars in your retirement account at work. 

The IRS has raised the employee contribution limit for 401(k), 403(b) and most 457 plans to $19,500, up from $19,000 in 2019. 

If you’re 50 or older, you can save an additional $6,500.  That’s up from $6,000 in 2019. 

The contribution limit for individual retirement accounts, whether traditional or Roth, is holding steady at $6,000, plus another $1,000 for savers 50 and over. 

One caveat: The IRS limits high-income earners’ ability to make direct contributions to Roth IRAS-accounts in which you can save after-tax dollars, have the money grow tax-free and use it in retirement free of taxes. 

In 2020, if you adjusted gross income exceeds $124,000 and you are single ($196,000 for married couples filing jointly), you won’t be able to make a full contribution directly to a Roth IRA. 

Instead, those savers might consider using a strategy known as the “backdoor Roth”, where they make a nondeductible contribution with after-tax dollars to a traditional IRA and then covert it to a Roth. 

Health Saving Opportunities

Got a high deductible plan in 2020? You most likely have access to a health savings account. 

These accounts allow you to put away pretax or tax-deductible money and have it grow free of taxes.  You can take a tax-free withdrawal to cover qualified health expenses. 

In 2020, you can save up to $3,550 if you’re an individual with self-only health coverage.  That’s up from $3,500 in 2019.  Account holders with family plans can save up to $7,100 in this account (up from $7,000 in 2019). 

Gift and Estate Tax Savings

Good news for people sitting on millions of dollars: The Tax Cuts and Jobs Act nearly doubled the amount that decedents can bequeath in death-or gift over their lifetime-and shield it from federal estate and gift taxes, which are 40%.

Before the tax overhaul, the gift and estate tax exemption was $5.49 million per person. 

For 2020, the lifetime gift and estate tax exemption will be $11.58 million per individual, up from $11.4 million in 2019. 

Finally, the annual gift exclusion-the amount you can give to any other person without it counting against your lifetime exemption-will hold steady at $15,000 for 2020.

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。

Tips to Boost Your Tax-Free Income in Retirement

“Although workers are told to put every spare pre-tax cent into a traditional 401(k) at work, the reality is that once the time comes to tap that account for income in retirement, income taxes will follow.”

There is a bright side to the income taxes that will follow you into retirement. Create a pool of tax-free income, advises CNBC, by following the advice in the article “3 tips to help boost your tax-free income in retirement.”

Introduce yourself to the Roth IRA and the Roth 401(k). Unlike a traditional IRA, with a Roth IRA you pay taxes when you make your contribution to the account. The funds then grow tax-free over time and, as long as you meet certain conditions, there are no taxes on withdrawals. With a Roth IRA, there are none of those pesky RMDs (Required Minimum Distributions). However, there are withdrawal distribution requirements for a Roth (401)k.

Most employers offer Roth IRA and Roth 401(k) accounts, so there’s a good chance they are offered by your employer.

Roth IRAs are often offered along with their counterpart, the traditional 401(k). Between the two of them, it’s possible to save as much as $19,000 in 2019. For those workers who are 50 and over, you can add $6,000 as a catch-up contribution.

The power of the Roth 401(k) is the tax-free compounding that takes place over time. Don’t miss out on this, if you want to max out your tax-free savings.

There are two different types of Roth plans: the Roth 401(k) and a Roth IRA. Roth IRA plans have income limits. If your modified AGI (Adjusted Gross Income) is more than $137,000 for a single and $203,000 for a couple filing jointly, you aren’t allowed to make a direct contribution to a Roth IRA. However, there are no income caps for Roth (401)k. You can also save more for retirement in a Roth 401(k), compared to a Roth IRA. Roth IRAs are also subject to annual contribution limits: $6,000 in 2019, plus a $1,000 catch-up contribution, if you are over age 50.

Here are three steps to make your retirement savings more tax free:

Can you do an in-plan conversion? If your employer offers a Roth 401(k), you may be able to convert some of your traditional 401(k) savings to the Roth. This is called an in-plan Roth conversion. Just like a direct contribution to a Roth 401(k), it will be taxable. Therefore, make sure that you run the numbers before moving funds. You’ll be responsible for taxes on pretax principal and earnings. Don’t do it all at once, so that you don’t find yourself moved into a higher tax bracket.

What does your plan allow? If you’ve left your employer and have money in both a traditional 401(k) and a Roth (401)k, you might want to convert those accounts — if your retirement plan allows it.  Remember that you may not write a check from an outside bank account to add after-tax money to a Roth 401(k).

What’s your time-frame? Just as young workers are in the best position to save early and often, they are also in the best position to make the most out of Roth savings accounts of all types. It’s likely that younger workers have not yet reached their full career and earnings stage, so now is the best time to put money into a Roth 401(k). When incomes are higher, so will taxes on Roth retirement account contributions. If you’re close to retirement, there are other timing factors to consider, primarily Medicare. How much you pay for Medicare Part B and D, which covers doctor’s visits and prescription drugs, depends upon your modified gross income from two years ago. Do the conversion to a Roth at age 62, if you intend to file for Medicare at age 65.

Reference: CNBC (Feb. 10, 2019) “3 tips to help boost your tax-free income in retirement”

 

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”

Make the Most of Your Retirement Savings Potential

“Everyone wants to retire with ample savings in their bank account. Plan your retirement, by avoiding these eight common IRA mistakes.”

IRAs, or Individual Retirement Accounts, are great tools for retirement savings. The best tactic says Born2Invest in the article “Retirement planning: 8 common IRA mistakes” is to make the most of your IRA, as early in your career as possible. That will give you a larger nest egg later in life.

Avoid these classic errors and keep that IRA growing!

Not contributing. This is the biggest mistake of all. Most of your retirement income will come from money you saved while you were working, not the gains they earn. Missing a single year means missing out on the compounded growth that occurs over time. Save as much as you can.

Not contributing enough. Traditional IRAs and Roth IRAs let you contribute $5,500 every year. Once you turn 50, there’s a catch-up contribution so you can contribute up to $6,500. Saving the maximum amount, lets you enjoy the benefits from a tax and savings perspective.

Examining tax benefits. There are different rules for Roth IRAs, different rules for traditional IRAs and (you guessed it!) different rules for 401(k)s. Educate yourself about the different benefits that each offers. If you’re in a high tax bracket now and expect to be in a low tax bracket later in life, you might want to use a traditional IRA. However, for the opposite, a Roth might be your best bet.

Don’t forget the distributions. This is one of the costliest mistakes that people can make. Traditional IRAs have Required Minimum Distributions (RMDs) that require you to take out a certain amount, starting when you turn 70½. Did you miss the window? Tax penalties are steep: up to 50%. Roth IRAs don’t have RMDs, except when the account is inherited by a non-spouse beneficiary.

Pick the right retirement account for you. Far too many people just pick a traditional IRA without exploring other options. Maybe a SIMPLE or a SEP would be right for you. If you’re self-employed, there are several different retirement accounts and you may be able to put away more pre-tax dollars.

Don’t miss rollover deadlines. When you change jobs, you can roll over an old 401(k) to an IRA, with no tax penalty. However, those funds have to make it to the new account within 60 days. Best bet: do a direct rollover and remember you can only do this once every 365 days, for all your IRAs.

Invest wisely and effectively. IRAs give you some degree of choice over where you invest. Don’t just opt for the most conservative funds; diversify with a balance of higher risk and return vehicles and more stable, low-interest ones. Don’t put your money at risk but don’t let it stagnate either.

Forgetting to name beneficiaries. Just like other investment accounts, you’ll need to name a beneficiary for your retirement accounts. What your will and other estate documents say does not have any impact on the distribution of assets in your retirement accounts. You must name beneficiaries, and if possible, successor beneficiaries, so your assets go where you want them to. Repeat: the beneficiary designation supersedes your will, so chose your beneficiaries with care and review them every few years.

Reference: Born2Invest (Sep. 11, 2018) “Retirement planning: 8 common IRA mistakes”