FAQ

We’re frequently asked questions about this, that, or the other thing involving retirement plans and taxes.  Not only do we think our clients can use an FAQ resource, we’ll be using it too, to help answer questions we get.  (There’s only so much information we can store in our heads without occasionally double-checking our answers!)  Is the question you need an answer to not asked below?  Go to ASK AN EXPERT, and ask your question.  We’ll send you an email with our answer—and if appropriate, edit our FAQs to include your question for the next person seeking that answer.

401(k)

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Your Contributions
  1. $18,000, but no more than 100% of your paycheck (less FICA taxes). Some plans, for IRS considerations, may impose lower limits for some or all plan participants.
  2. If in the current calendar year you are age 50 or older, you can also make a catch-up contribution of $6,000 in addition to the $18,000.
  3. These dollar limits can increase year-by-year given inflation and IRS rules.
  4. Certain employees designated by the IRS as “highly compensated” may not be able to defer as much as they might otherwise prefer. If you are impacted by these IRS rules, your HR department will undoubtedly inform you of your deferral limitations.

No. While you can make both Roth and “traditional” 401(k) contributions, the total contributions into your 401(k) cannot exceed the current year’s dollar limitations (or a lesser amount if your compensation is less than the dollar limitations).

  1. No, contributions to a 401(k) must be deducted from your paycheck.
  2. PLANNING TIP: It might be possible to contribute 100% of your paycheck into the 401(k) late in the calendar year and use your savings to make up for the lost take-home pay. Ask your payroll department about the frequency with which you can change the amount coming out of your paycheck.

  1. 401(k) contribution limits are not “per plan” but “per calendar year”. The amount you contributed into another plan in the current year will reduce the amount you can contribute to your new 401(k) plan.
  2. When participating in two 401(k) plans in the same calendar year, neither your former employer nor your current employer must monitor how much you contribute in total for the year: it’s your responsibility to track this.  If you contribute too much, there are potential adverse tax implications to you when you file your tax return for that year.

No. Contributions to a 401(k) must be made from your paycheck. Once you stop getting a paycheck from an employer, your ability to defer into that company’s 401(k) plan also stops.

No. But most likely you can make an IRA contribution for your spouse.  See the FAQs on IRAs.

No. If you employer does offer a 401(k), consider yourself one of the lucky ones:  More than half of all workers in the United States do not access to a workplace retirement plan!  Your employer undertakes significant cost, operational aggravation, and fiduciary liability to make a 401(k) available.  Take advantage of it!


Employer Contributions

There is a formula that will be spelled out in a Summary Plan Description or in an annual notice to you.

  1. Under all circumstances, a matching contribution will only be made if you have deferred money into the plan. Don’t miss out on this important benefit by failing to contribute to your 401(k).
  2. Some plans will not offer a matching contribution. It still makes great sense to defer, however. You may be forgoing tax savings for the contribution and tax-deferred accumulation. And how else are you going to save money for retirement.
  3. Some plans state that contributions are “discretionary” meaning that the Employer could decide later it cannot afford to make a matching contribution—even if you contributed.
  4. Some plans require that you meet certain conditions to receive a match. For example, you must be employed on the last day of the plan year; or you must have worked a certain number of hours during the plan year.
  5. Some plans are “safe harbor” plans. Instead of making a matching contribution, the employer will make a “profit sharing” contribution for eligible employees even if they do not defer into the 401(k).

  1. A “safe harbor” 401(k) plan allows an employer to skip certain testing requirements that might otherwise constrain certain employees from being able to defer the maximum dollar amounts. To secure this relief, the plan must either:
    • Match deferrals with a formula as favorable as dollar-for-dollar on the first 3% of compensation deferred and fifty-cents on the dollar for the next 2% of compensation deferred (in total a 4% match); or
    • Contribute at least 3% of compensation to every eligible employee whether they defer or not.
  2. Safe harbor contributions cannot have “allocation conditions”, e.g., last day of the year employment, or hours of service, in order to receive an employer contribution
  3. You are fully vested in safe Harbour contributions with the exception of “additional, discretionary” safe-harbor contributions.


Roth
  1. Unlike “traditional” 401(k) contributions which are tax-deductible, Roth 401(k) contributions are not tax-deductible in the year you make the contribution.
  2. Unlike “traditional” 401(k) account balances that are taxable upon distribution from your plan, earnings on your Roth account balance are tax-free when withdrawn – providing the distribution is a “qualified distribution.”
    1. For a distribution to be “qualified”, two conditions must be met:
      1. You are over the age of 59 ½;
      2. The Roth account has existed for 5 years.
    2. Distribution of Roth contributions are always tax-free. The question is whether the earnings on the Roth balances are taxable or not.

Yes, but the total annual contributions of both types cannot exceed the annual dollar limitation in effect for the current year.

  1. Yes and no.
    1. Once a contribution has been processed via a payroll, its designation as a Roth or “traditional” contribution cannot be changed.
    2. Subject to administrative rules regarding the frequency with which you can change the amount of your 401(k) deferrals, you can change how FUTURE contributions are designated as Roth or “traditional”.
  2. PLANNING TIP: If your plan allows for in-plan conversions, traditional, pre-tax plan balances can be changed to Roth account balances. This conversion is a taxable event and the tax liability must be paid with your annual tax return.

No, all employer contributions will be subject to taxation when withdrawn from the account.

  1. YES, if one of the following applies:
    1. You are paying no income taxes.
    2. You are in a low tax bracket and expect in future years to be in a higher tax bracket.
    3. You think your income tax rate at retirement will be higher than it currently is.
    4. The tax-deduction for a “traditional” 401(k) contribution is unimportant to you.
    5. You are in a high tax bracket and want to maximize the after-tax income you will have during retirement.
  2. NO, if one of the following applies:
    1. The tax deduction for a “traditional” 401(k) contribution is important to you—and the deduction helps you to make a larger 401(k) contribution.
    2. You will be in a lower income tax bracket during retirement.


Eligibility
  1. You first need to fulfill certain conditions, such as:
    1. Attainment of a certain age, usually 21
    2. Number of Hours of Service, for example 1,000
    3. The ability to defer into the 401(k) vs. eligibility to receive an employer contribution can have different condtions attached to each
  2. Next, you must wait until an “entry” date. Examples of entry dates are the next January 1 or July 1; or the first day of the calendar quarter;
    1. There could be different Entry Dates for deferring into the 401(k) vs. being eligible to receive an employer match
  3. Eligibility conditions will be spelled out in the plan’s Summary Plan Description (“SPD”). If you do not have a copy of the SPD, ask your HR Department for one.

  1. You may not be eligible for the plan yet.
  2. You didn’t defer into the 401(k), a necessary condition for receiving a match.
  3. You didn’t fulfill certain eligibility conditions, such as:
    1. Last day of the year employment
    2. Hour of Service during the Plan Year


Vesting

Vesting is a term that describes your right to receive your account balance upon distribution from the plan. For example, you are 80% vested in an account that is worth $20,000. Upon distribution, you will receive $16,000.  The other $4,000 is “forfeited”.

  1. You are always 100% vested in your 401(k) deferrals.
  2. You are always 100% vested in non-discretionary, employer Safe Harbor contributions
  3. Terms of your company’s plan dictate if other “sources” of contributions, e.g., regular matches, profit sharing, etc., are subject to a vesting schedule.

  1. The plan defines a Year of Service, typically a calendar year in which you work 1,000 hours.
  2. For each Year of Service, you become more vested. Typical vesting schedules give no vesting until you have 2 Years of Service—at which point you are 20% vested.  With each passing year, you earn an addition 20% vesting such that you are fully vested after 6 Years of Service.

You might possibly earn a Year of Service for the last calendar year of your employment, but beyond that, nothing increases your percentage of vesting (unless the company terminates the plan).


Distributions
  1. No. You can generally get access to your account balance upon certain “distributable events”:
    1. Termination of employment
    2. Death
    3. Disability
  2. Money in your retirement account should be used for what it is intended: your retirement.

  1. Only if the plan allows for hardship distributions—and not all plans do.
  2. You must give proof of your financial hardship.
  3. If the plan has a loan provision, you may be required to take a loan rather than a hardship distribution.

  1. Funds to avoid foreclosure or eviction
  2. Medical expenses not covered by insurance
  3. Funeral expenses
  4. Home purchase
  5. Post-secondary education expenses

  1. Unless Roth in character, your distribution will be taxed at your current tax bracket—given all the other income you have received—in the year of the distribution.
  2. Earnings on your Roth account balance are tax-free when withdrawn providing the distribution is a “qualified distribution.”
    1. A distribution to be “qualified”, two conditions must be met:
      1. You are over the age of 59 ½;
      2. The Roth account has existed for 5 years.
    2. Distribution of Roth contributions are always tax-free. The question is whether the earnings on the Roth balances are taxable or not.

  1. NO, if:
    1. In all situations, the distribution occurs after age 59 ½.
    2. You have terminated employment in the year in which you are age 55 or older.
      1. This exception applies only to the distribution of account balances of plans in which termination of employment occurs at age 55 or older.
    3. You take your distribution as a series of “equally periodic distributions” for a period not less than 5 years AND through to your age 59 ½ or older.
  2. YES, in all other circumstances.


Rollovers

The difference is what you do with the money within 60 days after it leaves the plan—and its tax consequences.

  1. If you do not deposit the money into another 401(k) plan or an IRA, it is a distribution and is taxable.
  2. If within 60 days you deposit it into another 401(k) plan or an IRA, it is a rollover and not taxable—nor subject to a 10% penalty.

  1. The plan will withhold a mandatory 20% Federal tax withholding of any money leaving the plan.
  2. Depending on your state of residency, state taxes must also be withheld if you do not give instruction to the contrary.
  3. You can ask that higher percentage of Federal and state taxes be withheld.

  1. Only if you instruct your plan to send your account balance directly to your IRA or the 401(k) plan of your new employer. This is called a “trustee-to-trustee transfer”.
  2. If you are intending to rollover your account balance, it is best to have it happen via the trustee-to-trustee transfer.
  3. If not, when you do deposit your account balance into that IRA or new 401(k) plan, you won’t have the amount of federal and state withholdings to deposit unless you have other sources of funds. Thus you may inadvertently receive taxable income and a tax penalty.

  1. Only if the new plan agrees to accept a rollover. Plans are not required to accept them.
  2. You cannot under any circumstances rollover Roth IRA balances into a 401(k) plan.
  3. The IRS does permit you to rollover Roth 401(k) balances from one 401(k) plan to another.


Loans
  1. Only if the plan allows for loans. Many employers feel strongly that plan money is for retirement and procedures should be in place to help you retain your plan balances for that express purpose.
  2. Some plans restrict the number of loans you can have at any given time. So if you have an existing loan, you might have to pay that loan off first before taking a new loan.
  3. Some plans restrict loans to certain “source” of money in the plan, for instance, 401(k) deferrals. Thus you might have a profit sharing contribution but no deferrals., and thus cannot take a loan.

  1. Some plans allow you to take a loan for any purpose—even imprudent ones!
  2. Some plans restrict your ability to borrow money from the plan to only include financial hardships. Most plans use the IRS’ definition of financial hardship to include:
    1. Funds to avoid foreclosure or eviction
    2. Medical expenses not covered by insurance
    3. Funeral expenses
    4. Home purchase
    5. Post-secondary education expenses

  1. The lesser of $50,000 or 50% of your vested account balance.
  2. The amount you can borrow may be reduced by the maximum outstanding loan balance you have had within the prior 12 months.
  3. Most plans impose a minimum loan amount, for example, $1,000.

  1. As a general rule, up to 60 months.
  2. Some plans allow longer terms for loans used to purchase your primary residence.
  3. Almost all loans are due upon termination of employment even if prior to the original term of the loan.

  1. The plan’s recordkeeper generally imposes a loan fee and annual servicing costs.
  2. You will be charged interest on your loan.
    1. Interest is generally 1 or 2 percentage points greater that the Prime Rate at the time of the loan.

Only if a Plan’s Loan Policy Permits it.

No, not even if the loan is taken out to help you purchase your primary residence.

  1. Your plan account is credited the interest you pay.
  2. In essence, one of your plan’s investments is a loan you have made to yourself.

IRA

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Contributions
  1. You can contribute the lesser of $5,500 or your eligible compensation
    1. Eligible compensation is your W-2 wages and any other income to which you pay self-employment taxes
  2. If you are age 50 or older in the calendar year for which the IRA is being contributed, you can make a “catch-up” contribution of $1,000, thus increasing the dollar limitation to $6,500
  3. Contribution limits can change year by year given an inflation calculation.

Yes, by the normal filing date of your personal tax return for the year you wish to make a contribution, generally April 15.

  1. For example, you wish to make an IRA contribution for year 2018. If not directly deposited, its delivery by U.S. Mail must be postmarked by April 15, 2019.

Yes, but the contributions to an IRA for your benefit and that of your spouse cannot exceed the total of your compensation.

Yes, but the real question is, “can the contribution can be tax-deductible?”

  1. Yes, if you or your spouse are not “covered” by a workplace retirement plan.
    1. Look at Box 13 on the Form W-2 you receive from your employer for a check mark in the “Retirement plan” box. If it’s checked, your IRA contribution may be limited. If you are still not certain, check with your (or your spouse’s) employer.
  2. Maybe. If you or your spouse are “covered” by a workplace retirement plan, there are limits on how much of your IRA contribution can be deducted.
    1. Check Box 13 on Form W-2
  3. If you or your spouse are “covered” by a workplace retirement plan, the amount you can deduct depends on your filing status and the amount of your “modified adjusted gross income” or MAGI:
    1. Filing Single or Head of Household
      1. Your MAGI is $61,000 or less: full deduction
      2. Your MAGI is more than $61,000 but less that $71,000: partial deduction
      3. Your MAGI is $71,000 or more: no deduction
    2. Married Filing Jointly or Qualifying Widow(er)
      1. Your MAGI is $98,000 or less: full deduction
      2. Your MAGI is more than $98,000 but less than $118,000: partial deduction
      3. Your MAGI is $118,000 or more: no deduction
    3. Married Filing Separately
      1. Your MAGI is $10,000 or less: partial deduction
      2. Your MAGI is $10,000 or more: no deduction


Roth IRAs

Contributions to a Roth IRA are not tax-deductible, nor are distributions of earnings from a Roth IRA taxable if the distribution is “qualified”.

  1. To be a “qualified distribution”, you must meet BOTH of the following constraints:
    • You are age 59 ½ or older.
    • You have had the Roth IRA account for at least 5 years.
  2. Non-qualified distributions of earnings are subject to ordinary income taxation and a 10% premature distribution penalty if the distribution occurs prior to age 59 ½.
  3. Withdrawal of your original contributions are never taxable no matter when they are withdrawn—nor are they subject to a 10% premature distribution penalty.

Yes, and the total you make to your regular IRA and a ROTH IRA cannot exceed the dollar limits in effect for the current year.

  1. Yes. Conditions are your filing status and your “modified adjusted gross income” or MAGI
    1. Filing Single, Head of Household, or Married Filing Separately and you did not live with your spouse at any time during the year
      1. Your MAGI is $118,000 or less: full contribution up to the limit
      2. Your MAGI is more than $118,000 but less than $113,000: a reduced amount
      3. Your MAGI is $133,000 or more: no Roth contribution
    2. Married Filing Jointly or Qualifying Widow(er)
      1. Your MAGI is $186,000 or less: full contribution up to the limit
      2. Your MAGI is more than $186,000 but less than $196,000: a reduced amount
      3. Your MAGI is $196,000 or more: no Roth contribution
    3. Married Filing Separately and you had lived with your spouse at any time during the year
      1. Your MAGI is $10,000 or less: a reduced amount
      2. Your MAGI is $10,000 or more: no Roth contribution
  2. There are no income restrictions when making Roth contributions to a 401(k).
  3. Unlike when determining if your IRA contributions are deductible, the fact that you are “covered” by a workplace retirement plan is not a consideration.


Required Minimum Distributions
  1. For a Regular IRA, you must start taking “required minimum distributions” for the year in which you turn age 70 ½.
  2. For a ROTH IRA, no distributions are required.
  3. The amount of your required minimum distribution is based upon your age, the age of your beneficiary, and the marital or non-marital relationship of your beneficiary.
    1. Your first Required Minimum Distribution will be less than 5% of your account balance
    2. See the following IRS publication for specific information about the amount of your Required Minimum Distribution: https://www.irs.gov/publications/p590b/index.html

  1. If the decedent was required to take a distribution for the year of death and had not yet done so, that distribution must be made and is paid to the decedent’s estate. In other words, it cannot be rolled over under any circumstances.
  2. If you are a spousal beneficiary, you treat the IRA as if it was always yours.
    1. If a Roth IRA, then no distributions are required.
    2. If a regular IRA:
      1. If you have not reached your 70 ½ year, you need not take a distribution.
      2. If you are in your 70 ½ year or later, you must take a distribution based on your life expectancy in the year following the death of your spouse.
  3. If you are a non-spousal beneficiary, you cannot treat the IRA as your own nor roll it into your own IRA. It must be registered as an “inherited IRA.”
    1. Generally, you must begin to take a distribution in the year after the decedent’s death.
      1. EXCEPTION: If the original owner had died prior to taking a Required Minimum Distribution (RMD), you can delay any distribution until the December 31 of the 5th year anniversary of the decedent’s death AND in this instance, you must withdraw 100% of the inherited IRA.
    2. The amount of your required minimum annual distributions are determined by the age at the time of the IRA owner’s death: whether he or she dies before or after the year in which he or she would have taken an RMD


Taxation of Distributions

A 10% penalty for taking distributions prior to age 59 ½.

  1. Waived if the distribution is from an account you inherited.
  2. No penalty for distributions of contributions to a Roth.
    1. Penalty will apply to a distribution of earnings, however.
  3. Avoided if you take a series of “substantially equal payments” from the IRA and maintain those annual distributions until age 59 ½ AND for at least a minimum of 5 years.

  1. Generally, yes. Taxes will be at ordinary income tax rates.
    1. You cannot deduct losses from your IRA investments, nor utilize capital gain tax treatment.
  2. EXCEPTIONS:
    1. You never pay taxes on Roth contributions.
    2. Earnings on Roth contributions are exempt from taxation if the distribution is qualified: To be a “qualified distribution”, you must meet BOTH of the following conditions:
      1. You are age 59 ½ or older.
      2. You have had the Roth IRA account for at least 5 years.
    3. Non-deductible IRA contributions are not subject to taxation.
    4. Unlike a Roth contribution, when taking a distribution, only a portion of your distribution will be considered a return of non-deductible IRA contributions.


Rollovers
  1. It is a distribution of the account balance from a workplace retirement plan or IRA into another workplace retirement plan or IRA, AND;
  2. It is a distribution in which the account balance was paid directly to you.

In a transfer, the distributed amount is paid directly to the trustee or custodian of the receiving plan?

You must complete the rollover with 60 days of receipt of the distribution.

  1. An IRA
  2. A retirement plan of a new employer providing the employer will agree to accept the rollover

  1. As to Roth IRAs? No.
  2. From a regular IRA, yes, BUT only if your employer’s plan allows it.
  3. No, for a non-spousal beneficiary of an inherited IRA.

  1. NO! Any subsequent rollovers within that 12-month period will be considered taxable distributions.
  2. There is no restriction on the number of transfers that can occur within a 1r-month period, or subsequent to a rollover.


Loans

No, loans to oneself or family members are not permitted. Such a loan would be considered a taxable distribution.

No, as that pledge will be considered a taxable distribution of your entire IRA account balance.

  1. No, under all conditions and circumstances.
  2. If you have an outstanding 401(k) loan at the time you terminate employment with the plan’s Sponsor, full repayment of the loan is required or it will result in a taxable distribution to you—even if the balance of your account is rolled over into an IRA.
    1. Check with the Plan’s administrator how much time you have before they deem the loan a taxable distribution. At the very longest, it is the last day of the calendar quarter following the calendar quarter in which your employment ended.  For instance, you quit on March 1.  You have until June 30.
  3. If you go to work for another employer with a retirement plan with a loan program, they might accept a rollover of your old loan into their plan.
    1. The plan of a new employer is not required to accept rollovers from another company’s retirement plan or outstanding loans.
    2. If a rollover of your loan is an option, you have a short window in which to make this happen before your old plan must – according to IRS regulations – deem your loan a taxable distribution.

Taxes
2017 IRS Tax Rate Schedule
Tax Rate Single Filers Married and Filing Jointly or Qualifying Widow(er) Married and Filing Separately Head of Household
10% $0 – $9,325 $0 – $18,650 $0 – $9,325 $0 – $13,350
15% $9,326 – $37,950 $18,651 – $75,900 $9,326 – $37,950 $13,351 – $50,800
25% $37,951 – $91,900 $75,901 – $153,100 $37,951 – $76,550 $50,801 – $131,200
28% $91,901 – $191,650 $153,101 – $233,350 $76,551 – $116,675 $131,201 – $212,500
33% $191,651 – $416,700 $233,351 – $416,700 $116,676 – $208,350 $212,501 – $416,700
35% $416,701 – $418,400 $416,701 – $470,700 $208,351 – $235,350 $416,701 – $444,550
39.6% $418,401 and above $470,701 and above $235,351 and above $444,551 and above

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