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401K

SECURE Act Gives 401(k) Relief to Part-Timers

Part-time employees in companies with 401(k) plans won a big victory when the SECURE Act was signed into law on December 20, 2019. Before the SECURE Act, 401(k) plans could exclude employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-time employees from the chance to save in 401(k) plans. The SECURE Act provides relief beginning with the first plan year after December 31, 2020 (for most plans, January 1, 2021). Any employee who has worked at least 500 hours in three consecutive years and is age 21 or older by the end of the three-year period must be allowed to start making elective deferrals. However, years beginning before January 1, 2021 do not have to be counted for purposes of meeting the three-consecutive-year rule.

GUNFIGHT AT THE 401(K) CORRAL

When the chips are down, the providers hold all the cards. This is true for both IRAs and workplace plans. Ultimately, the IRA custodian (through its custodial form) and retirement plan sponsor (through the plan document) will dictate what a person can and cannot do with his retirement dollars. Prior to sauntering into a local saloon and sitting down at the poker table, be sure to know the rules of the game before asking to be dealt in. For example, if a deceased IRA owner named both his son and daughter as beneficiaries, the custodian can refuse to allow the children to stretch the inherited IRA RMD payments over their own life expectancies. Additionally, what if the beneficiary son wants to disclaim his portion of the IRA? A custodian does not have to accept disclaimers, either.

HOW THE TOP-HEAVY RULES FOR 401(k) PLANS WORK

Just like eating too much pumpkin pie with whipped cream isn’t good for your waistline, being a “top-heavy” retirement plan also may not be healthy. Sponsors of certain retirement savings plans must have their plan tested each year to determine if it is “top-heavy.” The top-heavy test is designed to make sure that lower-paid employees receive at least a minimum benefit if most plan assets are held for higher-paid employees. Section 401(k) plans are subject to top-heavy testing, unless the plan uses a “safe harbor” contribution formula. SEP-IRAs are also subject to testing, but most will automatically comply. Section 403(b) and 457 plans and SIMPLE IRAs are exempt from the top-heavy test.

The Time Machine

A time machine would be cool to have. Even if it only worked on financial assets, it sure would come in handy. One might jump into the future and see if an investment paid off, or you could look around to see where the smart money succeeded. And if the original investment turned out to be a loser, you could go back in time and sell it – or never even buy it in the first place. Too bad financial time machines don’t exist. Bummer. While literal time machines have yet to be invented and we can’t quantum leap,

Delaying RMDs From an Employer Plan and IRA Rollovers: Today’s Q&A Mailbag

This week's Slott Report Mailbag answers reader questions about delaying RMDs from an employer plan and IRA rollovers.

Are You Over 70.5 Years Old and Still Working? Understand Your Options With RMDs: This Week’s Q&A

This week's Slott Report Mailbag examines RMDs when you are still working past 70.5 years old and inheriting multiple IRAs.

Don’t Inherit a Mess When Your Spouse Passes Away: This Week’s Q&A

This week's Slott Report Mailbag looks into inherited IRAs, spousal rollovers, and 401(k)'s.

When You Want to Transfer 401(k) Funds from a Former Employer: This Week’s Q&A

This week's Slott Report Mailbag looks into into IRA contributions and rolling over 401(k) assets from former employers.

Quiz Yourself with These IRA Questions!

After you’ve answered the questions below, scroll down to see the answers and see how well you know your stuff!

3 Reasons a 401(k) Deferral Beats an IRA Contribution

1) There Are No Restrictions Preventing a Tax Break When you defer a portion of your salary into a traditional 401(k), the amount deferred will reduce your taxable income dollar-for-dollar. This is true regardless of how much income you (and your spouse, if applicable) have. In contrast, contributions to a traditional IRA are generally entitled to a tax deduction as well, but if your income is above certain limits and you (and/or your spouse, if applicable) are an active participant in an employer-sponsored retirement plan, then that deduction can be reduced or eliminated. Thus, in some scenarios, a contribution to a traditional IRA won’t help you reduce your current tax bill.

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