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Retirement Perspectives

The tax notice has been updated to reflect a number of recent rollover changes for retirement plans.

The myriad of rules governing tax advantaged retirement plans change frequently. Now, due to the Tax Cut and Jobs Act (TCJA) of 2017 as well as additional legislative changes, the rollover rules have changed—again.

The IRS, in Notice 2018-74 has updated the safe harbor tax notice due to these changes. The modifications reflect laws enacted and guidance issued since Dec. 8, 2014, which was the last time the IRS had revised these safe harbor explanations. The Special Tax Notice, an IRC 402(f) Notice, must be furnished to plan participants provided to recipients of eligible rollover distributions. In other words, the notice doesn’t have to be provided until the participant elects a distribution.

Plan administrators of section 401(a) qualified plans, 403(a) plans, 403(b) plans, and eligible 457(b) governmental plans are required by law to provide recipients of eligible rollover distributions with an explanation of the eligible rollover rules. The new 402(f) safe harbor tax notice follows a well-known forma—it has a separate notice for Roth and non-Roth distributions. One is for payments from a Roth account within a plan (e.g., Roth 401(k), 403(b), or 457(b)) and the other for all other non-Roth accounts. For those participants that have both contributions sources, both notices will be required to be distributed. Notably, a plan is not required to use the IRS model safe harbor tax notice. Instead, a plan can create its own notice.

The tax notice has been updated to reflect a number of recent rollover changes, including:

  • Extended rollover deadline for plan loan offset amounts: The TCJA extended the amount of time an individual has to rollover a loan offset resulting from plan termination or service separation. Previously an outstanding loan generally had to be repaid in 60 days post separation or face taxation and potential penalty. Effective January 1, 2018, the rollover deadline is filing due date (plus extension) for participant’s tax return for the year in which the loan offset amount arises. As a result, the loan offset rollover period can be as long as 21 months when the loan offset occurs early in the calendar year.
  • For example, a participant separates services on February 1, 2018 with an outstanding loan balance. Prior to the tax act, a participant had 60 days (April 2, 2018) to roll over the funds to an individual retirement account (IRA). Now, the participant could rollover offset funds as late as March 15, 2019 or until October 15, 2019 (including the extension).
  • Self-certification (late rollovers) under IRS Revenue Procedure 2016-47 provides an easier and less expensive way to complete a late 60-day rollover of retirement funds following a self-certification procedure outlined by the IRS.  Notably, the IRS requires a taxpayer to satisfy one of 11 preapproved reasons to continue to afford the funds’ tax deferred status. Previously, the only way to “fix” a late 60-day rollover was via a Private Letter Ruling, which was both timing consuming and expensive.
  • The expanded exception to the 10 percent additional tax under Code 72(t) on early distributions from a governmental plan (defined benefit or defined contribution) for qualified public safety officers who have reached age 50 under Defending Public Safety Employees' Retirement Act (DPSERA), expanded this exception to include specified federal employees who have reached age 50.
  • The exception to the 10% additional tax penalty under IRC Section 72(t) for phased retirement distributions to certain federal retirees under MAP-21.

The notice also provides clarity on a number of matters that weren’t included in prior revisions.

  • Clarifies that he 10% additional penalty tax under Section 72(t) for early distributions applies only to amounts includable in income.
  • Explains how the rollover rules apply to governmental 457(b) plans that included Roth contributions.
  • Clarifies that the exception to the 10% additional tax under 72(t) for payments from a governmental plan after a qualified public safety employee separates from service (if the employee will be at least age 50 in the year of separation) is not available for payments from IRAs.
  • Recognizes the possibility that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.


If you have any questions about this or another retirement topic, please e-mail me at
roadtoretirement@lordabbett.com.

 

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.

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.

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