2018 Year-End Checklist: Seize the Opportunity | Lord Abbett
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Retirement Perspectives

Now is the time to review your retirement plans to maximize potential savings for you and your family. Here is part 1 of our annual year-end checklist.

Before the frenzy of the holidays comes, seize the opportunity to check your retirement, education, and health savings accounts to make sure you’re taking full advantage of the benefits offered. With so much to cover, I’m featuring my annual checklist in two parts. First, I’ll give you a checklist for your IRAs and other retirement accounts and required minimum distributions (RMDs). In Part 2, I’ll discuss beneficiaries, rollovers, 529 plans, Coverdell ESAs, and health savings accounts (HSAs).

Q. Have you fully funded your 401(k)?
In 2018, you can defer maximum of $18,500 into your 401(k) or 403(b). The limit is an aggregate of all pretax and/or Roth contributions made.

Tip: 457(b) deferrals are not coordinated with contributions to a 403(b) or 401(k) plan. Thus, you can fully participate in a 403(b) or 401(k) without reducing the contribution limits to either plan. In other words, participation in both plan types offers a tremendous opportunity to fully fund both plans to maximize deferral limit, thus doubling your salary deferrals

In 2018, individuals participating in both a 457(b) and 403(b) or 401(k) can defer up to a $37,000 (for example, an individual can fund $18,500 into a 457(b) plus an additional $18,500 into a 401(k) or 403(b), for a total of $37,000). In addition, individuals age 50 and older can defer an additional $12,000 in a catch-up contribution.

Q. Have you fully funded your SIMPLE IRA?
In 2018, you can defer maximum of $12,500 into your SIMPLE IRA. By participating, you are eligible to receive a non-forfeitable employer contribution (3% match or 2% non-elective).

Q. Have you fully funded your individual retirement account (IRA)?
While it is true that you can wait until April 15, 2019 to contribute your IRA for the 2018 tax year, why not fund it now, if you are able to, and have the funds working for you on a tax-favored basis for a longer length of time?

Virtually anyone with reportable (earned) income is eligible to fund a traditional IRA up to $5,500 ($6,500 including the age 50+ catch-up) in 2018. However, everyone is not eligible to make Roth IRA contributions. Roth IRAs carry statutory maximum income levels, and investors must satisfy an annual income test. There are no maximum age restrictions on Roth contributors, although individuals older than 70½ cannot make contributions to traditional IRAs.

The spousal IRA is sole exception to the income requirement; available to those couples where one spouse has no earned income. Notably, the spousal IRA only applies to those (married) couples that file a joint tax return.

Tip: Participation in an employer-sponsored plan, such as a 401(k), 403(b), 457(b), SIMPLE, or SEP IRA, does not affect IRA eligibility or contribution limits. However, participation may affect whether or not your contributions are tax deductible.

A number of variables apply in determining whether taxpayers’ contributions to their traditional IRA are tax deductible. Variables include filing status, modified adjusted gross income (MAGI), and whether individuals and/or their spouses are active participants in a workplace retirement plan.

To learn more about IRA deductibility, see my column here.

Q. Have you funded a Roth IRA for a child?
There is no minimum age to establish an IRA. Instead a child, regardless of age, who has reportable earned income, is eligible to fund a Roth IRA. Once established, the IRA can be funded by anyone, up to the amount earned by the minor.  

For more information, see my article about establishing Roth IRA for a child.

Q. Did you mistakenly “overfund” your IRA?
. It’s a common error to over contribute to an IRA. "Excess contributions," as the IRS refers to them, typically occur when individuals unwittingly deposit funds that are not permitted to be made to an IRA.

There are a number of scenarios that can lead an IRA owner to overfund their IRA. For example, contributing more than the maximum  annual contribution limit ($5,500 in 2018/ $6,500 [age 50+], not satisfying Roth income-eligibility, and funding an IRA with an ineligible rollover are just a few of the common errors that lead to excess IRA contributions.

Reviewing all of your IRA account activity for the past year with your financial and/or tax professional can help you avoid an inadvertent overfunding that could result in taxes and/or penalties.

Q. Have you had the “back-door” Roth IRA discussion?
As noted, Roth IRA eligibility is means tested—that is, an investor must satisfy an annual income requirement. Since 2010, however, high-income earners, regardless of the amount of household income, have been eligible to fund a traditional IRA and subsequently convert those funds to a Roth IRA, a strategy commonly referred to as a “back-door” Roth IRA.

For more information on this popular strategy, see my column here.

Q. Did you make a nondeductible (aftertax) IRA contribution?
If you did, it is essential that you or most likely your tax professional complete and file IRS Form 8606 “Nondeductible IRAs.”

For more on nondeductible IRAs and form 8606, see my article.

Q. Did you take a distribution from a traditional IRA? 
The tax liability of any distribution (e.g. normal, conversion, or RMD) from any IRA once you have basis  is calculated and reported on IRS Form 8606. An IRA owner (or most likely their tax professional) is required file this form in those tax years that they make a non-deductible contribution and in any year that they take any distribution (including a conversion to a Roth IRA) from any IRA after they have accumulated non-deductible funds in an IRA.

For tax purposes, all IRAs (except Roth IRAs) are considered one single IRA regardless of where they have been established (e.g. different investment managers) and your distributions are taxed “pro-rata,” partly from your deductible (pretax contributions plus earnings, if any) and partly from your non-deductible (aftertax) IRA funds. In other words, when there are aftertax dollars (basis) in a traditional IRA (including Rollover IRA, SEP and SIMPLE) and you don’t withdraw the entire IRA value (across all IRAs), then the amount of the distribution subject to income tax is based on the ratio of aftertax dollars to total IRA assets (across all IRAs, including Rollover IRA, SEP and SIMPLE accounts) at the end of the year. This is known as the “pro-rata” rule.

For more on nondeductible (after-tax) contributions see my article.

Q. Did you (or intend to) make a Roth IRA conversion for 2018?
A.  Conversions are made on a calendar year basis. You do not have until April 15th 2019 to complete a prior year (e.g. 2018) conversion.  Instead, the funds must be distributed in 2018 and reported on a 2018 1099-R.

The Tax Cuts and Jobs of 2017 act lowered individual tax rates for many Americans, thus making Roth conversions more appealing.  Plus, IRA owners can convert as much or as little of a traditional IRA (including SEP and SIMPLE) to a Roth IRA as they want; although the amount of funds converted (minus any basis) is subject income tax (federal and state, if applicable) in the year of conversion. The conversion amount is taxed at your marginal tax bracket.

Tip: Converting to a Roth is irrevocable. This is due to a provision in The Tax Cut and Jobs Act of 2017 repealing the recharacterization of a Roth conversion.

For more on the eliminating of recharacterization, see my column.

Q. Did you turn 70½ in 2018?
In general, when you reach age 70½, you must begin to take required minimum distributions (RMDs) from your retirement accounts. However, you can defer your first RMD to April 1, 2019. However, if elected, you must take two RMDs next year [both your (deferred) 2018 and 2019 RMD].

If you have an IRA, SEP or SIMPLE (other than a Roth), you must begin taking required minimum distributions (RMDs) from that account when you reach age 70½ regardless if you are still working or if you don’t need or want the assets. Not taking an RMD subjects you to a 50% penalty tax.

401(k) plan assets are also subject to RMDs. However, unlike IRAs, your initial RMD could be deferred past age 70½. This exception is referred to as the “still working exception.” Here, you may not have to take a distribution from your 401(k) or like plan if: (1) You’re still working for the employer sponsoring the plan and (2) You’re not a “5% owner” of the company. In addition your plan must specifically allow for this exception.

To learn more about RMDs and the still working exception, see my column. https://www.lordabbett.com/en/perspectives/retirementperspectives/timing-rmds-wisely.html

Q. If you are older than age 70½, have you taken your RMD for 2018?
 Don’t forget that a hefty 50% penalty tax is applied to the minimum distribution amount that was required, but not taken.

For example, suppose your 2018 minimum distribution is $10,000. The distribution would have to be taken by Monday, December 31, 2018. But if you mistakenly withdrew only $1,000, a 50% excise tax of $4,500 would be applied to the $9,000 shortfall, plus you would be subject to federal income tax on the $9,000 in the year it is eventually distributed. The penalty tax is reported on IRS Form 5329, “Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.”

You can always take more than your annual minimum distribution.

Q. If you are subject to RMDs, have you included the value of all your IRAs in the calculation?
 Government rules require account owners to calculate RMD amounts for each individual (separate) IRA, including SEP IRAs and SIMPLE IRAs, but not Roth IRAs. Once calculated, however, the total or aggregate amount may be taken from any one or more IRAs. Notably, 401(k) and 403(b) are subject to different set of RMD aggregation rules.

For more on aggregating RMDs see my column here.

Q. If you are subject to RMDs, have you included your 401(k) account?
 401(k) plans (unlike IRAs) follow a different set of RMD rules. Unlike an IRA, 401(k) participants who own 5% or less of their current employer’s plan can defer their RMD until the later of the year they turn 70½ or the year they retire, whereas participants who own more than 5% are required to start taking RMDs at 70½, regardless of work status.

Q. If you are subject to RMDs, have you included your 403(b) account?
 Generally, RMDs must start no later than April 1 of the year following later of attainment of age 70½ or the date the employee leaves the employer sponsoring the 403(b). Notably, for 403(b) plans, only a special exception applies for the account value on December 31, 1986 if it’s been separately tracked. Here, the required begin date for RMDs is the later of age 75 or the date the employee separates from service from the employer sponsoring the plan.

It’s common for participants to own multiple 403(b) accounts. Like IRAs, individuals who have more than one 403(b) account must determine the RMD separately, although the aggregate amount can be taken from any one or more multiple 403(b) accounts. However, not all 403(b) plan sponsors permit aggregation with another 403(b) account from a different sponsor.

You cannot satisfy RMDs for one plan type (e.g. 403(b)) with an RMD from another plan type (e.g. 401(k)).

Q. Did you or (are you planning) on using net unrealized appreciation (NUA) strategy?
  NUA treatment requires a taxpayer to satisfy a number of rules. One requirement is all plan funds must be distributed by the end of the year. In other words, if plan funds remain (in the plan) at the end of the year, the lump sum distribution requirement will not be satisfied.

For more on NUA strategy, see my column here

Q. Did you turn any of these ages in 2018?


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.


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.

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.

A 403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.

A governmental 457(b) deferred-compensation plan allows employees of states, political subdivisions of a state, or any agency or instrumentality of a state to invest money on a pretax or Roth aftertax basis through salary reductions. The employer deposits amounts withheld into an annuity, custodial, or a trust account, where the funds accumulate tax-deferred or potentially tax free in the case of Roth aftertax contributions until withdrawals commence, usually at retirement.

About The Author

Webinar: Our Top Year-End Tips on Retirement & Education Investing
Join Brian Dobbis, Director of Retirement Solutions, in a discussion about year-end tips for retirement and education savings on Tues., Dec. 4 at 4:15 pm ET.

*Financial professionals only.


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