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June 2013 Click here to view previous issues Volume 6 Number 6

 In This Update:
  • Q of the Month:
    Does the 3.8% Investment Surtax Apply to Retirement Funds?
  • Key Focus:
    Retirement Plan Simplification Proposal
  • Ruling to Remember:
    Update Your Beneficiary Form




?? Question of the Month: Does the 3.8% investment surtax apply to retirement funds?

Q: Does the 3.8% investment surtax apply to retirement funds? For example, if I take a lump-sum distribution of my 401(k) plan, which holds employer stock, will the basis be taxed at 3.8% on top of income tax?

A: The investment surtax of 3.8% does not apply to MOST retirement payments. It could apply to certain non-qualified annuity payments. However, the retirement payment will increase your income and COULD put you over the threshold to where the surtax will apply. For example, the surtax will apply if modified adjusted gross income (MAGI) is over $250,000 (married/joint). If a couple's MAGI is $235,000 and they take a $25,000 IRA distribution, it increases the MAGI to $260,000, making some of their investment income subject to the surtax.

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Retirement Plan Proposals in the President's Budget

President Obama unveiled his 2013 budget back in mid-April. Although it is essentially a "wish-list" for the President, the number of retirement related items in this year's budget caused many clients, advisors and the media to take notice.

There were six proposals in this year's budget that directly relate to retirement accounts. In this month's issue of Ed Slott's IRA Advisor, we break down each of the six proposals so that you can answer the questions clients are continuing to ask. For each proposal, we give you the key information, the reason behind its inclusion, and its potential benefits and drawbacks.

And as you will read in the June Key Focus below, the President isn't the only lawmaker proposing retirement plan changes.


Inside Ed Slott's IRA Advisor Newsletter

Retirement Plan Proposals in President's Budget

  • Mandatory Auto-Enrollment IRAs for Certain Small Businesses
  • Mandatory 5-Year Rule for Non-Spouse Beneficiaries
  • Establish a "Cap" on Retirement Savings Prohibiting Additional Contributions
  • Create a 28% Maximum Benefit for Retirement Account Contributions
  • Eliminate RMDs for Clients with $75,000 or Less in Retirement Accounts
  • Allow Non-Spouse Beneficiaries to Make 60-Day Rollovers of Inherited Funds

Divorcee's Delay Costs Her Half of Ex-Husband's Pension

Ex-Wife's Pension Is Increased Twice After Ex-Spouse's Early Retirement

No 60-Day Rollover Waiver for Lack of Knowledge During Divorce

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June Key Focus

Retirement Plan Simplification Legislation Proposed

On May 22, 2013, Congressman Richard E. Neal (D-MA) introducted H.R. 2117, The Retirement Plan Simplification and Enhancement Act of 2013, in the House of Representatives. H.R. 2117 is proposed legislation that is intended to boost retirement savings.

The bill proposes several IRA related changes touched on below.

Rollovers of Life Insurance to IRAs Would be Allowed
One proposed change would allow the rollover of insurance contracts from your employer's qualified retirement plan (e.g. 401(k)) into your IRA. Currently, you cannot invest any part of your IRA in life insurance contracts. You can, however, invest a limited amount of your employer retirement plan money in life insurance. Under the current rules, you can't rollover your life insurance conract in your employer retirement plan to your IRA. The new legislation, if enacted, would allow you to do so.

No Required Minimum Distribution for Balances Under $100,000
Currently, everyone who has an IRA or other retirement account must take required minimum distributions (RMDs) starting at age 70 1/2, regardless of the balances in those retirement plans. It doesn't matter if your total balances are $50,000 or $5,000,000; you have to take RMDs. Under the proposed legislation, the RMD rules would be relaxed and you would not be forced to take RMDs if your total balance in all retirement accounts is $100,000 or less.

60-Day Rollovers for Non-Spouse Beneficiaries
Under current law, if you are a non-spouse beneficiary of someone who died and left you their IRA or employer retirement plan, you cannot move those retirement funds to a beneficiary (or inherited) IRA via a 60-day rollover. If you inherited an employer retirement plan or IRA and you are not the decedent's spouse, the only way to move those funds under current law is by law of a direct rollover or transfer. When money is moved in this manner, it goes directly from one retirement account to another, and you don't have control or use of the money while you are moving it. Under H.R. 2117, you would be allowed to take a distribution made payable to yourself and do a rollover within 60 days, similar to the way you can move your own retirement funds.

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Ruling to Remember

Hillman v. Maretta

Warren Hillman passed away at the age of 66 with a life insurance policy worth nearly $125,000. Over a five-year period, his ex-wife and his widow fought over the money. Recently, the Supreme Court decided that Hillman's ex-wife, Judy Maretta, was entitled to the entire policy.

Why did the court rule in favor of a woman who Hillman divorced 10 years before he died?

Hillman made a simple mistake that proved very costly. Like so many unfortunate souls before him, Hillman did not change the beneficiary designation for a life insurance policy when he divorced Maretta, or after his subsequent marriage to Jacqueline Hillman in 2002, or before his death.

Now, some states, like Hillman's home state of Virginia, have laws protecting such a massive oversight. The law provides that divorce revokes a beneficiary designation under a life insurance policy.

So what's the deal? Hillman's policy was part of a life insurance program for federal employees governed by the Federal Employees' Group Life Insurance Act of 1954. That law mandates that the proceeds on death are paid according to the beneficiary designation. The Supreme Court found that the federal law trumped the Virginia law.

Lesson to Learn:
Keep beneficiary forms up to date, especially after big life events.