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SPOTLIGHT ON EMPLOYEE BENEFITS (January 2010)
This newsletter summarizes some of the more relevant retirement and benefits developments that have occurred in the past several months that may affect you, your employees or your business. Please call us at 877-516-7339 for more information about any of these developments.New Guidance and Rollover Relief for Waiver of 2009 RMDs
Late last year, Congress passed a law that helps individuals who are taking, or are about to take, required payouts from employer-sponsored tax qualified retirement plans or IRAs. In essence, the law waives these Required Minimum Distributions (RMDs) for calendar year 2009. Without the waiver, many individuals with retirement accounts invested in devalued assets, such as stocks or mutual funds, would have needed to sell assets to generate RMDs, resulting in a capital loss for 2009.
In the closing months of the year, the IRS issued additional guidance on the waiver of 2009 RMDs. It provides transition relief through November 30, 2009. In general, retirement plan or IRA withdrawals that were made despite the 2009 RMD waiver will not be taxed if the funds are rolled over to a retirement plan within 60 days of the withdrawal. The rollover relief gives older taxpayers an unusual opportunity to correct an inadvertent mistake that would have increased their taxable income for 2009. It also gives some individuals a "retroactive" chance to reduce their tax bill if their financial circumstances have improved during the course of 2009.
Getting Ready for Next Year's IRA-to-Roth-IRA Conversion Rules
Two new rules have been adopted that impact conversion of IRA funds to Roth IRAs. For tax years after 2009, the $100,000 modified Adjusted Gross Income (AGI) limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will now be able to convert funds in a traditional IRA into a Roth IRA.
Why Convert an IRA to a Roth IRA?
Roth IRAs have two major advantages over regular IRAs:
1.) Distributions from regular IRAs are taxed as ordinary income (except to the extent they represent nondeductible contributions). By contrast, Roth IRA distributions are tax-free if they are "qualified distributions," that is, if they are made (a) after the five-tax-year period that begins with the first tax year for which the taxpayer made a contribution to a Roth IRA, and (b) when the account owner is 59-1/2 years of age or older, or on account of death, disability, or the purchase of a home by a qualified first-time homebuyer (limited to $10,000).
2.) Regular IRAs are subject to the lifetime RMD rules that generally require minimum annual distributions begin in the year following the date when the IRA owner attains age 70-1/2. By contrast, Roth IRAs aren't subject to the lifetime RMD rules.
There are other tax advantages as well. Because qualified distributions from Roth IRAs are tax-free, they may keep a taxpayer from being taxed in the higher tax bracket that would apply if the withdrawals were taxable distributions from a regular IRA. Also, Roth IRA distributions don't affect the calculation of tax on Social Security payments, and have no
affect on AGI-based deductions. What's more, the benefits flow through to beneficiaries of Roth IRA accounts, who also can make tax-free withdrawals from such accounts. (However, Roth IRA beneficiaries are subject to the same annual post-death minimum distribution rules that apply to beneficiaries of regular IRAs.)
Converting Unused Leave to 401(k) Savings
In response to President Obama's initiative to help working families save more for retirement, the IRS has released guidance for two revenue rulings that address the contribution of accrued but unused leave to retirement plans. The IRS clarified that qualified retirement plans may be amended to allow or require employees to contribute unused annual paid time off (PTO) or PTO that they have accrued at employment termination. PTO contributions are either considered employer non-elective contributions or employee elective contributions, depending on if the PTO plan allows employees to carry unused PTO into the next year.
2010 Limits for Qualified Employee Benefit Plans
The IRS has issued the cost-of-living adjustments for 2010 for qualified employee benefit plans. Note that the 2010 limits will remain at their 2009 levels.
For more detailed information, please see our online Resource Center under "Retirement Plans". Or, feel free to give us a call to find out how you might be able to save on your retirement plan costs.
Dennis D. Davis Jr., SPHR, CEBS, QKA, QPA, CPC
Benefits Manager
505-998-33294