2018 Year-End Checklist: More Tips

The second part of our annual checklist covers retirement plan beneficiaries, rollovers, college savings, and health savings accounts.

Last week’s article focused on items you should review for your individual retirement account (IRA) and other retirement plans before year-end. In this second installment, I’ll focus on beneficiaries, rollovers, Coverdells, and health savings accounts (HSAs). Here’s a handy guide to make sure your accounts are current and that you’re taking full advantage of the benefits offered by these tax advantaged accounts.

Q. Are all beneficiary designation forms in order?
A. Retirement accounts generally are not subject to probate, so the beneficiary designation on file, rather than a will, is what prevails. Did you get married this year? Divorced? Did a previously designed beneficiary predecease you? Birth of a child? Adoption? Any of these life events could affect your beneficiary designation.

Review and, if necessary, update your beneficiary forms for all your retirement accounts. Are the correct individual(s) designated to receive the benefits?

Q. Did you inherit an IRA or qualified plan from someone other than your spouse in 2017?
A. If you did, and intend on "stretching" the payout, you must begin taking minimum distributions—even if it’s a Roth IRA—before the end of 2018, regardless of your or the deceased’s age. If this deadline is missed (a common occurrence), rules generally require the entire inherited account to be paid out in full within five years after the decedent’s death (i.e., referred to as the “five-year rule”). For example, a beneficiary inheriting an account in 2018, a complete distribution would be required by December 2023.

Q. Have you established separate inherited IRAs for each designated beneficiary?
A. When multiple beneficiaries stand to inherit an IRA, it’s beneficial to divide the account into separate inherited IRAs for each beneficiary. This approach, when finalized by December 31 of the year following the death of the IRA owner, allows each beneficiary to use his or her own life expectancy for future minimum distributions. If separate inherited accounts are not established in a timely manner, all beneficiaries must use the life expectancy of the oldest beneficiary (i.e., shortest life expectancy) to determine the annual minimum distribution payout.

Designated (named) beneficiaries who inherited IRAs in 2017 have until December 31, 2018 (the year following the year of the IRA owner’s death) to split the account into separate shares so that each beneficiary can use their own life expectancy to calculate required minimum distributions (RMDs). Each share should be transferred into a separate, properly titled inherited IRA. The account can be split after December 31, but beneficiaries will be “stuck” using the life expectancy of the oldest beneficiary.

It is best to split the IRA by the end of the year of death, if that’s possible. It is not required, but if you can do this, each beneficiary will have a separate account balance in his/her own inherited IRA as of the end of the year of death. That is the balance you would use to calculate your first RMD as a beneficiary.

Q. What do you need to know about qualified charitable distributions from IRAs this year?
A. In late December 2015, through the enactment of the Protecting Americans from Tax Hikes (PATH) Act, Congress made qualified charitable distributions (QCDs) permanent.

First permitted in 2006, QCDs are tax-free IRA distributions up to $100,000 annually, which are sent directly to a qualifying charity. QCDs can be made from traditional IRAs, Roth IRAs, and inactive SEPs and SIMPLE IRAs belonging only to account owners or beneficiaries who are 70½ or older.

Tip: If you have already taken your 2018 IRA RMD, it’s too late to satisfy it with a QCD.

To learn more about qualified charitable distributions, see my column.

Q. Did you do a 60-day rollover in 2018?
A. Verify that 60-day rollovers were completed in a timely fashion.  Further, confirm that only one 60-day IRA-to-IRA rollover per account owner was done in a 365-day period (not calendar year).

Q. Have you distributed SIMPLE IRA plan notifications to eligible employees?
A. Employers that sponsor SIMPLE plans are required to distribute notices to eligible participants providing plan information such as the opportunity to make or change salary deferrals, summary plan description, and employer contribution formula (3% match or 2% non-elective) for the following year. The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31).

Q. Are you complying with the SIMPLE IRA “exclusive plan” rule?
A. A SIMPLE IRA must be the only qualified retirement plan an employer maintains during a calendar year (“exclusive plan rule”). However, if no contributions are made and no benefits accrue to an existing qualified plan (e.g., 401(k)) during this time period, the employer will satisfy the requirement.

For more information on SIMPLE IRAs and the “exclusive plan” rule, see my column.

Q. Have you funded a Coverdell Education Savings Account?
A. The deadline to establish and/or fund a Coverdell ESA for 2018 is April 15, 2019. The total contributions for the beneficiary cannot exceed $2,000 in any year, no matter how many accounts have been established. Any individual can contribute to a Coverdell ESA if the individual's household income (MAGI) for the year is less than $110,000. For married couples filing joint returns, that amount increases to $220,000. (See here for more on Coverdell ESAs.)

Q. Have you contributed to a health savings account (HSA)?
A. You may be eligible to contribute to a HSA if you are enrolled in a high deductible health plan (HDHP). HSAs are triple tax-advantaged accounts that are designed to be used for future medical costs. In 2018, an eligible individual with single coverage can contribute $3,450, whereas the limit is $6,900 for family coverage. In addition, a $1,000 catch-up contribution is available to those individuals aged 55 and older.

Tip: Once you determine the maximum allowable HSA contribution, you can make contributions anytime between January 1 and April 15 of the following year. For example, you can make a 2018 HSA contribution as late as April 15, 2019.

To learn more about HSAs, see my column.

Q. Did you inherit a HSA in 2018?
A HSA requires an account holder to name a beneficiary, just as you would with an IRA or 401(k). And similar to retirement accounts, the individual you name inherits the HSA after your death. Moreover, as with retirement accounts, you can name anyone as beneficiary, including spouse, non-spouse, estate, etc. Naming a HSA beneficiary follows a number of guidelines for group retirement plans and IRAs—but that is generally where the parallel ends.

If your beneficiary is your spouse, then your HSA, upon death, becomes your spouse's HSA. The surviving spouse can continue to access HSA funds, and distributions for qualified medical expenses will be tax free, the same way they would be if distributed to the now-deceased account owner. However, beneficiaries other than a surviving spouse or the estate must include the full value of the HSA as taxable income in the year in which the account owner dies. So, unless you name your spouse as the beneficiary of your HSA, the account loses its tax-advantaged status as a HSA upon death of the account holder. The amount that is required to be included in gross income by any beneficiary (other than the estate) is reduced by the amount of qualified medical expenses that were incurred by the decedent prior to death and paid by the beneficiary within one year of death.

A non-spouse beneficiary does not have the option of establishing an inherited HSA, which means the option to “stretch” payouts is also unavailable. As a result, limited payout options could lead to receiving a sizable amount of income within a short time frame, potentially bumping a non-spouse beneficiary into a higher marginal tax bracket.

Sometimes an estate is named the beneficiary of a HSA. Special rules apply here, too—the total distribution is included on the deceased account owner’s final tax return—not estate beneficiaries.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY OF TERMS

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.