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Retirement Perspectives

Mark these dates on your calendar to take action on various retirement accounts to help avoid possible roadblocks.

We associate autumn with back to school, football, foliage, and the beginning of the holiday season. When it comes to retirement accounts, October is an important month because a number of deadlines apply. Overlooking these important deadlines may lead to a financial headache. Keep this list as a handy reference as the month progresses (we’ve even included an important date to remember in November).

October 1

  • SIMPLE IRA Establishment. October 1 is the deadline for an employer to establish a SIMPLE IRA plan, effective for 2019. Those plans established after October 1 would not be effective until January 1, 2020, at the earliest. Notably, an exception applies for a newly established business.

    (For more information on SIMPLE IRA establishment, see my recent article.)   

October 15

  • 2018 SIMPLE IRA Employer Contributions. This is the deadline for those sponsors who have yet to fund 2018 employer contributions (e.g., match or non-elective); they have until a business’s tax-filing deadline plus extension. 
  • Make a 2018 SEP IRA Contribution. The deadline for funding a SEP IRA is the business’s tax-filing deadline plus extensions.

    (For more information on SEP IRAs, see our article.)

    Tip: Other prior-year (2018) IRA contributions (e.g., Roth, traditional) are not permitted, even if an individual is on a tax-filing extension
    .
  • Withdraw Excess IRA Contributions. October 15 is the deadline for removing an excess contribution, thus avoiding paying a 6% penalty tax.

    It’s a common error to overfund IRA accounts. "Excess contributions," as the IRS refers to them, typically occur when individuals unwittingly deposit funds that are not permitted to be made to IRA accounts.

    Individuals, however, are often unaware that they have run afoul of the rules and, upon being informed of that misstep, are unsure of how to correct it. Paradoxically, in order to fix the mistake, time is of the essence.

    There are several situations that could result in excess contributions being made inadvertently to IRA accounts. Among the most common are: making a traditional or Roth IRA contribution, even though the investor failed to satisfy eligibility; contributing more than the annual limit; or funding an IRA with an ineligible rollover, such as a required minimum distribution (RMD), or a hardship withdrawal, neither of which is permitted.

    The good news is that tax law permits excess IRA contributions to be withdrawn without penalty—if corrected within a certain period of time—that is, the tax-filing deadline (including extension). If not corrected by the deadline, the excess contribution plus earnings are subject to a 6% penalty for every year the excess remains in the IRA on Form 5329PDF Document.
  • 401(k) Plans: IRS deadline for filing Form 5500 after an extension. The filing deadline for filing Form 5500 is the last day of the seventh month following a 401(k) plan’s year-end (July 31 for calendar-year plans). However, an employer can apply for an automatic 2½ month extension of time to file their Form 5500 by filing Form 5558 (extending deadline to October 15 for calendar-year plans). 

What are the penalties for not filing the Form 5500 on time?

Late 5500 forms are subject to the following penalties:

  • The IRS penalty for late filing of a 5500-series return is $25 per day, up to a maximum of $15,000.
  • The DOL penalty for late filing can run up to $1,100 per day (as indexed for inflation), with no maximum.

However, employers who have not yet been notified by the DOL about their missing Form 5500 can file a late return using the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) to pay a decreased penalty.

Under the DFVCP, the maximum penalty for a single late Form 5500 is $750 for small 401(k) plans and $2,000 for large plans.  

  • Recharacterization of Roth IRA Contribution. In 2018, as part of the Tax Cut and Jobs Act, recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (e.g., 401(k)) was repealed. As a result, all Roth conversions taking place on or after January 1, 2018, are permanent. However, recharacterizing Roth contributions is still permitted. For instance, a traditional IRA contribution can be recharacterized to a Roth IRA contribution and vice-versa.

    (For information on the elimination of recharacterization, see my column.)

October 31

  • Trust as named beneficiary. October 31 is the deadline for the trustee of an IRA inherited by a trust in 2018 to provide required documentation to the IRA custodian. Providing documentation to the IRA custodian is one of the requirements for a trust to qualify as a “look-through” trust. In addition, there are other requirements that must be met to qualify as a look-through trust, thus allowing the oldest beneficiary the ability to “stretch” payouts.

    (For more on naming a trust as beneficiary, please see my recent column.) 

November 1

  • SIMPLE IRA Employee Notification. November 1 is the deadline for plan sponsors to notify eligible employees. This is accomplished by distributing an annual notice prior to the beginning of a new plan year.

    The election period generally is the 60-day period immediately preceding January 1 of a calendar year for employers who continue offering a SIMPLE IRA plan for 2020. The notice will provide plan specifics, including eligibility (make or changes salary deferrals) and employer contribution (e.g., 3% match, or 2% non-elective) for the 2020 plan year.

    Tip: Once the employer contribution formula is determined, it cannot be modified until the following plan year.

 

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.

Qualified Retirement Plan—This is a savings plan that is allowed certain tax advantages because it meets criteria spelled out in the IRS Code and in the Employee Retirement Income Security Act [ERISA] of 1974. Employers can take tax deductions for any contributions they make to an employee's account. Employee contributions and investment returns are tax-deferred until withdrawn. Contribution limits apply, as do penalties for early withdrawal.

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.

Required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

An IRA rollover may involve the application of fees and charges to the investor. A rollover is the process of moving your retirement savings from your retirement plan at work (401(k), profit-sharing plan, etc.) into an Individual Retirement Account (IRA). 

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