New Retirement Account Rules
Contributing to a retirement account qualifies you for tax breaks and sometimes employer contributions. A new perk retirement accounts will soon have is a legal requirement for unbiased investment advice. There have been several other tweaks to these accounts that have an impact on who is eligible to contribute and how big their tax savings will be. Here’s a look at several new features of 401(k)s and IRAs.
Advice in your best interest. Beginning in April 2017, a financial professional who makes investment recommendations to you about your 401(k) or IRA will be legally required to provide advice that is best for your situation, not the funds that provide the most compensation to the advisor. “A fiduciary level of care means the advisor must act in their client’s best interest,” says a certified financial planner and director of financial planning “The advisor will now be required to disclose their conflicts of interest.” This new fiduciary standard will only apply to retirement accounts, and advice provided about other types of taxable investment accounts will not be held to the same standard. However, you can still ask a financial advisor if they are willing to act as a fiduciary on your behalf for these accounts. Your existing assets will be grandfathered in under the old standard, but any new advice will be required to be in your best interest, and recommended funds must charge only a reasonable amount of compensation.
IRA charitable contributions. Withdrawals from traditional IRAs are required after age 70 1/2, and income tax is typically due on each distribution. However, if you donate part or all of your distribution (up to $100,000) directly to a qualified charity and you’re over age 70 1/2, you won’t owe any tax on the transaction. “If you are required to take a withdrawal from your retirement accounts this year and you don’t need that money to live on, you can avoid the taxes completely,” says a certified financial planner for Future Perfect Planning in Brooklyn, New York. IRA tax-free charitable contributions have been a temporary feature of IRAs since 2006, but they were recently made permanent by a December 2015 appropriations bill.
The myRA. A new retirement account, the myRA, was launched nationwide in November 2015. Aimed at people who don’t have access to 401(k) plans, savers can contribute up to $5,500 per year to this Roth account, or $6,500 if they are age 50 or older. There is only one investment option, a Treasury savings bond that pays a variable interest rate, but it is guaranteed never to lose value. However, once you hit the maximum myRA balance of $15,000 or the account turns 30 years old, your money will be transferred to a private sector Roth IRA.
Higher Roth IRA income limits. You can earn an extra $1,000 in 2016 and still save for retirement in a Roth IRA. Roth IRA eligibility phases out for individuals whose adjusted gross income is between $117,000 and $132,000 ($184,000 to $194,000 for couples). Roth deposits are made with after-tax dollars, but the earnings are not taxed each year, and withdrawals after age 59 1/2 from accounts at least 5 years old are tax-free. “It doesn’t help you with your current year tax picture, but it helps you in future years for every year your account is growing,” says a certified financial planner and founding partner of Legacy Care Wealth in Jersey City, New Jersey. “And when you retire, assuming you are of age to take the withdrawal, then you don’t have to pay taxes on that money, so that’s a real boost as well.”
Expanded access to the saver’s credit. Workers can earn a little bit more and still qualify for the saver’s credit in 2016. The adjusted gross income cutoffs are $30,750 for individuals, $46,125 for heads of household and $61,500 for couples. This valuable tax credit for low and moderate income workers is worth between 10 and 50 percent of the amount you save in a 401(k) or IRA up to $2,000 for individuals and $4,000 for couples. The saver’s credit can be claimed in addition to the tax deduction for a traditional 401(k) or IRA contribution or for a Roth account deposit, including the new myRA.