Retirement Spotlight: Tax Season 2021 | Lord Abbett
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Retirement Perspectives

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Transcript

Welcome to Retirement Spotlight.

TONY FISHER:

I'm your host, Tony Fisher.

Tax season is here. And many of us are wondering if there are steps we should be taking right now. Here with me today is Brian Dobbis, Lord Abbett's director of retirement solutions. Brian is going to talk about why it's important to review all of your tax-qualified accounts, including retirement, education, and health savings accounts today to ensure that you're taking full advantage of the benefits available to you.

We'll also talk about the temporary tax benefits available under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and any steps you need to take there. We invite you to read Brian's retirement perspectives content available on Lordabbett.com. There you'll find a wealth of educational content on tax-qualified accounts, including IRAs, 401(k), 529, health savings accounts, and more. (MUSIC)

Brian, thanks for joining us. Let's start with the CARES Act because my understanding is that although the retirement provisions in the CARES Act expired in 2020, there are a number of items that our listeners must be aware of now as they prepare their tax return. Brian, what should our listeners do with regard to the CARES Act?

BRIAN DOBBIS:

In March of last year, Congress passed the CARES Act. And among other things this gave taxpayers the opportunity to take a coronavirus-related distribution, or a CRD for for short, from their retirement account. A CRD is a distribution up to $100,000 if certain qualifications were satisfied.

BRIAN DOBBIS:

(MUSIC) For example, Tony, the CRD is not subject to the 10% penalty tax that usually applies to a retirement distribution if you are under age 59 and a half. However, the distribution is subject to income tax, federal and state and even local, if applicable.

So here are the steps that you need to take. One option in regards to the income tax is you can choose to report the total income from the CRD in one of two ways. It can either be included in your 2020 tax return, or it can be included ratably over three tax years for tax years 2020, 2021, and 2022.

However, Tony, and very important to our listeners once a taxpayer files his or her 2020 taxes reflecting one of the aforementioned methods, it cannot be changed. Furthermore, CRDs are tracked and reported using a new IRS form, form 8915-E. This is the form to report the CRD itself as well as repayment and to determine the amount of any CRD that is includable in income.

In addition, Tony, a CRD is eligible for repayment, very much like a rollover. However, the repayment period is three years, Tony, not the customary 60 days as most rollovers are subject to.

TONY FISHER:

Wow.

BRIAN DOBBIS:

So, you know, keep in mind you do have the opportunity to repay, roll over. And if you have already paid your taxes on the withdrawal and you later decide to do the repayment, you can file an amended tax return to recover the taxes. Even better, Tony, the repayment is not required to be made to the same retirement accounts the funds were originally distributed from.

Instead, the repayment can be made to any eligible retirement account, such as a traditional IRA, so long as it is done within the three-year period. And my final comment on the repayment, Tony, it is not a lump sum repayment, meaning listeners, it could be done within piecemeal or as a lump sum as long as it's done within that three-year period.

TONY FISHER:

So just to recap, Brian, the step you need to take is to report the income from a CRD and decide if you want to repay it?

BRIAN DOBBIS:

In essence, yes, Tony. So you have the option of, how do you want to report the income, again, in all of 2020 or ratably

TONY FISHER:

Uh-huh.

BRIAN DOBBIS:

And then within the next three years, the taxpayer has the decision of whether or not they want to repay the money and then be eligible for a refund.

TONY FISHER:

So what can you tell us about the CARES Act and the minimum required distribution?

BRIAN DOBBIS:

Well, Tony, I think as our listeners are probably aware of the CARES Act waived 2020 required minimum distributions, both for account owners and beneficiaries of all retirement accounts with defined benefit plans being the exception. But importantly, the waiver has not extended to 2021 RMD. So as of this recording, 2021 RMDs are due.

So but there are steps to take, Tony, for our listeners to be familiar with for the for last year. So as I mention, the RMD waiver under the CARES Act offered the rare exception to roll over what would have been an RMD. Normally, Tony RMDs cannot be rolled over.

So since the CARES Act waived RMDs, the distribution that would have otherwise been an RMD is simply now, Tony, a normal distribution which was eligible for rollover. So the CARES Act allowed you to take a distribution that would have been an RMD and simply roll it back.

Therefore for our listeners, it's crucial to know if you find yourself in this situation, it must be reported correctly, meaning the distribution and the subsequent rollover must be reported ensuring tax-free status. I strongly urge our listeners to communicate all rollovers to their accounting professionals.

Now, bear in mind that with normal RMDs returning for 2021, I would also mention to our listeners it's a good time to remember that the RMD age was increased from age 70 and a half to 72. Therefore, for any of our listeners who may be reaching age or turning age 70 and a half in 2021, there is no required minimum distribution this year. And finally, Tony nothing changed in regards to Roth IRAs. Roth IRAs still are free of lifetime required minimum distributions (MUSIC) regardless of age.

TONY FISHER:

Let's move on beyond RMDs, or required minimum distributions, to other things our listeners should be looking at right now. Although 2020 is in the rearview mirror, there are a number of tax-advantaged accounts that can still be funded for the (DISTORTS) 2020 tax year, right?

BRIAN DOBBIS:

Right. And Tony, the first one that comes to mind is the individual retirement account, the IRA, is a perfect example of prior year funding. An eligible individual still has time to fund a 2020 traditional or Roth IRA contribution. And that can be done as late as tax filing deadline, which for most individuals is April 15th. However, April 15th is a hard deadline, meaning-- extensions are not included. So again, April 15th is the deadline to make a traditional or Roth IRA contribution for the 2020 year.

TONY FISHER:

Though should we briefly review the traditional and Roth--

BRIAN DOBBIS:

Yes, sure.

TONY FISHER:

Eligibility rules?

BRIAN DOBBIS:

These changed. The rules change. The contribution limits change. So pretty much anyone with reportable income is eligible to fund a traditional IRA up to $6,000, $7,000 including the age 50-plus catchup contribution for the 2020 tax year.

And a recent law change repealed the rule that prevented an otherwise ineligible individual to fund a traditional IRA in the year they attained 70 and a half. So Tony, therefore, starting last year, 2020, an individual can contribute to a traditional IRA regardless of their age.

So anyone regardless of age, as long as they have earned income, can fund a traditional IRA. However, Tony, Roth IRA eligibility rules are a little different. Here with Roth IRAs, you do need earned income, very much like a traditional. But the Roth also carries a statutory maximum income threshold.

Therefore, investors must satisfy an annual income test in addition to having compensation. And like a traditional IRA, Roth IRAs do not impose a maximum age cap for contributors. Now, I would like to mention one thing, Tony, to our listeners.

TONY FISHER:

So we've covered traditional and Roth IRAs. What about SEP IRAs, and can they be funded after the end of the tax year?

BRIAN DOBBIS:

Absolutely, Tony. And I'm glad you asked that question because SEP IRAs, although it's an IRA, the rules are a little different. SEP IRA contributions can be made as late as the business owner's tax filing plus an extension. So potentially, a business owner can fund a SEP IRA as late as October 15th, 2021 for the 2020 tax year.

TONY FISHER:

Right. So Ryan (SIC), what other tax-qualified accounts can be funded after the end of the tax year?

BRIAN DOBBIS:

A Coverdell Education Savings Account or an ESA as they're commonly referred to. The deadline to establish and contribute to a Coverdell ESA for 2020 is like an IRA, April 15th, 2021. However, the total contributions for the beneficiary cannot exceed $2,000.

An HSA is a triple tax advantage savings account that helps pay for future medical costs. But very much like an IRA, you can still fund an HSA for 2020 through April 15th. And an individual for single coverage can contribute up to $3,550. And the limit is doubled for family coverage.

Plus, tack on a $1,000 catchup contribution to those individuals age 55 and older. Yes, folks, it's age 55 for health savings account checkups, not age 50 for not age 50 as it is with retirement accounts. And finally, Tony, in regards to HSAs in order to be eligible to contribute and establish an HSA you do need to be enrolled in a high-deductible medical plan, a high-deductible health plan.

TONY FISHER:

Great information, Brian. By the way listeners, you can learn more about HSAs and check out our previous podcast covering HSAs at Lordabbett.com. Brian let's switch now to distributions, specifically IRA distributions. What do our listeners need to know if they took a withdrawal from their IRA?

BRIAN DOBBIS:

Generally, a distribution from an IRA is subject to ordinary income taxes in the year of distribution, federal and state if applicable, plus a potential 10% early distribution penalty if the funds are withdrawn prior to age 59 and a half.

However, when it comes to IRA distributions, there is something important. And in my experience, it is frequently overlooked. And that is the accounting for IRA basis, meaning the non-taxable part of your IRA. So there is a need to determine the basis.

However, once an IRA owner or beneficiary has accumulated any basis, it should be reported on IRS form 8606, referred to as non-deductible IRAs. An IRA owner, or most likely their tax professional, is required to file the 8606 in those tax years in which a non-deductible contribution was made to a traditional IRA and in any years that funds are distributed including a conversion to a Roth IRA from any IRA that contains non-deductible dollars.

Now Tony, for tax purposes all IRAs, except Roth accounts, are considered a single IRA regardless of where they were established, for example a different IRA providers or different investment houses. And distributions are taxed proportionately, known as pro rata, partly from your pre-tax dollars which are tax-deductible contributions plus earnings, if any, and partly from your basis, your non-deductible dollars.

So in other words, when they after after-tax dollars, i.e. your basis in a traditional IRA, which includes SEP and SIMPLEs, and the entire balance across all your IRAs isn't distributed, let me repeat that, isn't distributed, the amount of the distribution subject to income tax is based on the ratio of all after-tax dollars to total IRAs at the end of the year.

Again, this is known as the pro rata rule. I understand that this is a bit technical. But a tax professional can help you with this. Again, ladies and gentlemen, determine if you have after-tax money in any of your IRAs. And if you took a distribution, discuss with your accounting professional, your tax professional how to recover that basis so you aren't inadvertently double-taxed.

TONY FISHER:

Okay, Brian a lot of heavy content. Wouldn't you agree?

BRIAN DOBBIS:

I definitely would agree with that, Tony. (BACKGROUND VOICE)

TONY FISHER:

Yeah. We covered a lot of ground. So let me quickly summarize three things that we’d discussed that our listeners should be on the lookout for this tax season to maximize their opportunities. Number one, we said, is to be sure to account for any CARES Act distributions and choose what year to take the income.

Number two is to look at other tax-qualified accounts such as HSAs or ESAs and consider making a contribution to these accounts by April 15th for 2020. Number three, be aware of the tax implications of any IRA distribution, and especially understanding your tax basis. Does that sound about right, Brian?

BRIAN DOBBIS:

Tony, that sounds great. I'm going add one more thing regarding the CARES Act distributions. The CRD, again, can be repaid up to three years after the distribution was taken. So in addition to reporting the income, there is the ability to repay it and recoup the tax liability.

TONY FISHER:

Right, that's a big one. All right.

BRIAN DOBBIS:

All right, good.

TONY FISHER:

Thank you, Brian.

BRIAN DOBBIS:

Thank you, Tony. Thank you for having me.

TONY FISHER:

We would like to remind everyone to visit Lordabbett.com for more information again on any of the topics that Brian has discussed today. Subscribe and rate us on Apple Podcast, Spotify, or your favorite streaming app of choice. Thanks, everyone.

_

IMPORTANT INFORMATION

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may be compound-tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the years received and may be subject to a 10% federal tax penalty if withdrawn prior to age 59 and a half 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 59 and a half 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 Simplified Employee Pension Plan, or SEP IRA, is a retirement plan specifically designed for self-employed people and small business owner.

When establishing a SEP IRA for your business, you and 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 or salary reduction contributions on an after-tax and/or pre-tax basis.

Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of the eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Retired minimum distribution, or 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 70 and a half. Roth IRAs do not require withdrawals until after the death of the owner.

A Health Savings Account, or HSA, is a savings account that lets employees set aside money on a pre-tax basis to pay for qualified medical expenses. A Coverdell Education Savings Account, or ESA, offers investors the ability to save for a child's education. Contributions to an ESA are made with after-tax dollars.

However, individuals used to contributions to an ESA are made with after-tax dollars. However, withdrawals used to pay for qualified education expenses are tax-free. Qualified expenses include tuition, fees, books, etc. A 529 plan is a taxed-advantage savings plan designed to encourage savings for future education cost.

529 plans, legally known as qualified tuition plans, are sponsored by states, state agencies, or education institutions, and are authorized by Section 529 of the Internal Revenue Code. An ABLE Account, also called a 529A Account, allows individuals with disabilities and their families a tax-advantaged way to save money for disability-related expenses of an account's designated beneficiary.

Contributions to an ABLE Account may be made by any person using post-tax dollars. Contributions to an ABLE Account may be made by any person using tax-- contributions to an ABLE Account may be made by any person using post-tax dollars. The ABLE Account was created with the passage of The Stephen Beck Jr. Achieving a Better Life Experience Act of 2014, or ABLE Act.

A qualified charitable contribution, or QCD, allows individuals who are 70 and a half years old or older to donate up to $100,000 annually to one or more charities directly from a taxable IRA instead of taking their required minimum distribution.

Net unrealized appreciation, or NUA, of employer stock held in an employer-sponsored retirement plan permits gains that occurred inside the plan to be taxed outside of the plan, i.e. brokerage account, at a preferential long-term capital gains rate. A catchup contribution allows people aged 50 or older to make additional contributions to their retirement account.

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 avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law or 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 adviser for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to reflective of actual results and are not indicative of any particular client's 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 invice (SIC) in a fiduciary capacity.

If you are an individual-- retirement investor, contact your financial adviser 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 59 and a half 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 might 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 59 and a half 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 401(k) is a qualified plan established by employers to which eligible employees may make salary-deferral, salary-reduction contributions on an after-tax and/or pre-tax basis. Employers offering 401(k) plan may make matching or non-elective 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.

This broadcast is copyright 2021 of Lord Abbett & Co. LLC. All rights reserved.

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