IRS Releases Rollover Guidelines

For many people, a 401(k) offers a way to save money for retirement. Last year was the first year that people under the retirement age were allowed to rollover investments into an IRA account. The IRS has issued guidelines to employers whose 401(k) plans offer Roth accounts rollovers for contributors younger then retirement age.

The key part that governs the rollovers for participants under the retirement age of 59 ½, is how the rollover occurs. Participants can only rollover money into an IRA account directly, and because the distribution of funds is not allowed, the 60-day rule does not apply.

The IRS is allowing time for the sponsors of such plans to amend their plans to allow rollovers. The amendments must be made by December 31, 2014. This time can also be used to allow sponsors to have participants elect to have salary deferrals into their Roth.

The IRS advises sponsors on the following to make the process simpler and easier to implement:

  • Restrict the types of contribution and eligible balances for Roth rollovers. This can help avoid the burden of tracking all the distributions for some or all of the Roth balances.
  • Have a clause where sponsors can eliminate the in-plan rollover at any time as long as it does not discriminate in favor of highly compensated employees.
  • Favorable tax treatment only applies to Roth distributions made after five years front eh date the Roth was established.

A Guide to Rollovers as Business Startups

Since the economic downturn, more than 10,000 new businesses were started with rollovers as business startups (ROBS). They have been able to use their retirement funds without triggering early distribution penalties, to establish their new business venture. How is this possible? Are there any cautions to look out for? The following outline the basic process of ROBS, and warns about some of the pitfalls associated with using the process to establish a new business.

This complicated process is under extreme scrutiny from the IRS. The following are the five basic steps to ROBS transactions:

  • The first step is for the entrepreneur to establish a new corporation, usually a C corporation.
  • Once the new corporations is established, the corporation adopts a prototype 401(k) that permits the plan participants to direct their investments into a selection of investments options, including employer stock. This plan usually allow the employee to roll over from an existing account or execute a direct transfer from an existing retirement account in to the plan and use it to buy the employer’s capital stock. There are no employees at this time, and the corporation does not have any assets, business operations, or even capital received to create shareholder equity.
  • When the entrepreneur becomes the corporation’s only employee, they elect to participate in the newly formed 401(k). They then direct the rollover or transfer of funds from the original retirement account to the new 401(K) account.
  • Once the funds have been transfer or rolled over, the entrepreneur direct to purchase newly issued corporate stock. This stock usually represents the amount of assets the entrepreneur wishes to invest in the new business.
  • The final step is to direct the corporation uses the funds from the sale of the stock to purchase a franchise, existing business, or begin a new business venture.

There are several pitfalls to watch out for when attempting this transaction. The IRS take each ROBS on a case-by-case basis to ensure that the arrangements are not being abused.


Budget Talks May Alter the Retirement Landscape

Many people contribute to some form of retirement saving account. Whether it is an IRA or defined contribution plan like a 401(k), Americans have contributed $8.82 trillion to some form of retirement account. With so much money stashed away, and not taxed, it not surprising that the government wants to get their cut, but the proposals will reshape the fundamentals of retirement finances and taxes in the US in general.

President Obama along with congress will begin debating the proposals October 1, and only time will tell how this will effect retirement saving in the future. Below are just three of the six proposals that could have the most impact on the retirement landscape. They are:

  • Inherited IRAs: With the current system, people, other than spouses, that inherit IRAs can spread out the withdrawals over their lifetime to minimize the impact on taxes paid. The proposal is for other people who are not spouses that inherit to empty the account by end of the fifth year after the original owner’s death. This means that more money will be required to be withdrawn from the account each year and the taxes paid will be considerably higher. There will be certain exemptions for beneficiaries, including those with disabilities.
  • Savings Cap: If this proposal passes, there will be a limit to the amount that can be contribute to retirement accounts. To do this all account would be considered as a whole, and when the total survivors annuity produces a joint payout of $205,000 a year then the person will no longer be able to contribute to their retirement accounts. While this probably will not affect most people now, as interest rates rise, annuities paying $205,000 a year would cost less and the cap would be lower.
  • Mandatory IRAs: This edict would apply to any business that has ten or more employees and have been in business for two or more years. It would require employers to develop and establish automatic enrollment in IRA for their workers. The contributions would be made through payroll deductions and the employees would be allowed to choose how much is contributed with 3% being the default amount. Employers would be granted tax credits to help design and establish plans, but this is just another thing business owners will have to worry about.

Timing Benefits: When to Tap into Social Security

Everyone knows that there is a magic age when a person can begin a new adventure, retirement is just such time. However, when is the right time to tap into social security? Retirement can be drawn as early as 62, but the Social Security Administration has also created an incentive program for workers that choose to wait until age 70 to retire.

Social security is an annuity that is paid out based on the age that you retire. If a person retires at age 62 then their payment will be 25% less than if they retired at age 66. If a person chooses to retire at age 70 they will earn an additional 8% per year which translates into almost $17,000 annually. The standard advice would be to wait to retire as long as possible. With other investment payouts, it is possible to delay social security payout until the time it is needed to supplement funds. By waiting until age 70 and taking advantage of the higher benefits, a person is provided with a kind of longevity insurance thanks to the government.

Now what about couples, well you are not forgotten. Couples can contemplate several options. The first being the “claim and switch” This is designed for a family that claims two incomes where both individuals are 66 years old. The spouse with the lower earnings (the wife) can retire and file for their benefits as long as the other spouse (the husband) has reached his full retirement age. The husband can then file for benefits based on the lower-earning spouse’s benefits and forgo his own benefits until age 70, when he can then retire and collect the maximum benefits. The wife can either switch to the benefit based on that of the husband or choose to keep her own; whichever is more advantageous to the couple.

Another choice would be for the couple to use the file and suspend. This works well for a couple where only one income is claimed. For example the husband works and the wife stays at home. The husband, at his full retirement age, can file and then suspend payments until the age of 70, and then the wife can file for spousal benefits. She could do this to delay taking out her own social security until the age of 70, where she could then switch if the benefit is higher.

There are many options in the vast and confusing world of social security benefits, but it is important to work with someone who can help navigate and analyze the individual situations.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.


Making It through Retirement

Most people when they get their first job start thinking about retirement. It seems like a faraway dream for many, but may be closer for other. How can a person prepare for retirement? What are their goals in regards to their retirement money? By looking at a client’s goals, determine if they want to have money to last through their life expectancy or make it last for generations. Knowing the client’s goals will help determine how to invest and help forecast what the returns will be on investments.

There are many unpredictable parts to determining the return on your assets. There is never an ironclad guarantees that your returns will come back at the rate you estimate. By creating forecasts at different rates and risks will help clients determine what could be a possible return on their investment.

The first step to consider is making sure there is adequate income generated and guaranteed through retirement. Annuities are good way to create a stream of income, as long as the underlying issuer is strong, but do not put all your eggs into one basket. It is better to have a diverse portfolio then to put all your money in one investment.

There are many variables that will make forecasting difficult to predict, including inflation, contingencies, and many other unknowns that can come from anywhere. Evaluate the effect of inflation on assets by calculating higher inflation rates than what we experience in today’s low-inflation environment. This will help to combat any changes that could affect income. It is also important to run scenarios over catastrophic long-term issues to insure that there is income to cover anything that could happen.

While some people just want to have enough to make it through retirement, some clients would like to leave a legacy for their children or multiple generations. To help achieve this goal, it is important to keep the burden of estate taxes as low as possible.

Overall, it is the client’s money and it is important to help them achieve their goals in how they want their money to work for them.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.