2014 brought about significant changes to the retirement planning landscape for advisors and clients alike, so that we’ve now ushered in a year that will be full of new planning opportunities—and pitfalls. Whether your client is concerned with maximizing tax-preferred account options, planning for increased longevity or using their retirement accounts as estate planning vehicles, the rules have changed for 2015.
Here are some of the top retirement planning trends that your clients need to be aware of in order to maximize their retirement account values in 2015 and beyond.
1: QLACs Become a Reality
While the IRS released proposed regulations introducing the qualified longevity annuity contract (QLAC) in 2012, carriers only began offering the products late in 2014, after the rules were finalized—so that QLACs are likely to gain traction in 2015. A QLAC is a type of annuity contract that is purchased within a retirement plan (though Roth accounts are excluded) and under which payments are delayed until the purchaser reaches old age.
Importantly, the value of the QLAC is excluded from the retirement account’s value when calculating the client’s required minimum distributions (RMDs) once the client reaches age 70 ½.
The annuity premium value is limited to the lesser of $125,000 (to be adjusted for inflation) or 25 percent of the account value, though the rules provide a correction procedure for clients who accidentally exceed these limits. In general, QLACs are not permitted to offer cash surrender or commutation values, but the final regulations do permit a return of premium feature so that the premiums that have been paid, but not yet received as annuity payments, will be returned to the account if the client dies before they have been received.
2) Split 401(k) Rollovers Maximize After-Tax Contribution Value
In 2015 and beyond, the IRS will now allow a distribution from an employer-sponsored retirement account to be treated as a single distribution even if it contains both pre-tax and after-tax contributions, and even if those contributions are rolled over into separate accounts, so long as the amounts are scheduled to be distributed at the same time. Therefore, the taxpayer can now allocate pre-tax and after-tax contributions among different types of accounts in order to maximize their future earnings potential.
This presents a best-of-both worlds solution for higher income clients who have sufficient funds so that they are able to make contributions in excess of the pre-tax limit. If the specific plan allows for after-tax contributions, these taxpayers now have the freedom to contribute after-tax dollars with the knowledge that those funds can be separated and rolled directly into a Roth upon exiting the employer-sponsored plan—without tax liability.
This is a marked shift from the complexities of the previously existing rules, which permitted the distribution to be rolled partly into a traditional account and partly into a Roth, but the client was required to treat the distribution as two separate distributions—meaning that the distribution to each account would be treated as coming partly from pre-tax contributions and partly from after-tax contributions.
3: Using Trusts for Inherited IRA Creditor Protection
In 2014, the Supreme Court ruled that non-spousal inherited IRAs do not quality as creditor-protected retirement assets, generating renewed interest in how to properly structure the IRA as a wealth transfer vehicle. This will likely prompt many clients to look to trust vehicles as IRA beneficiaries in 2015 and beyond in order to shield any inherited IRA assets from a beneficiary’s creditors.
However, if IRA proceeds pass to a trust beneficiary that does not qualify as a see-through trust, the IRS prohibits the “stretch” treatment that would allow an individual designated beneficiary to take distributions from the inherited IRA based on his or her life expectancy. Instead, the non-qualifying trust is required to exhaust the account assets over a five-year period or the original owner’s life expectancy.
Trusts that do qualify as see-through trusts, however, are permitted to stretch IRA distributions over the life expectancy of the oldest trust beneficiary. In order to qualify as a see-through trust, the trust must satisfy the four basic requirements: the trust must be valid under state law, the trust must be irrevocable (or must become irrevocable upon the death of the IRA owner), the trust beneficiaries must be identifiable as of the date of the IRA owner’s death, and a copy of the trust must be provided to the IRA custodian by October 31 of the year after the IRA owner’s year of death.
4: Deferred Annuities Now Allowed in TDFs
Late in 2014, the IRS issued guidance to allow 401(k) plan sponsors to include deferred annuities within target-date funds (TDFs) without violating the nondiscrimination rules that otherwise apply to 401(k) investment options. This is the case even if the TDF investment is a qualified default investment alternative (QDIA)— a 401(k) investment that is selected automatically for a plan participant who fails to make his or her own investment allocations.
TDFs offered within the plan can now include deferred annuities even if some of the TDFs are only available to older participants—and even if those older participants are considered “highly compensated”—without violating nondiscrimination rules.
Similarly, the nondiscrimination rules will not be violated if the prices of the deferred annuities offered within the TDF vary based on the participant’s age. The new guidance will allow plan sponsors to include annuities within TDFs even if a wide age variance exists among the plan’s participants.
Additionally, the new rules allow plan sponsors to provide a participant with guaranteed lifetime income sources even if the participant is not actively making his or her own investment decisions with respect to plan contributions.
By removing the existing barriers, the IRS has now paved the way for plan sponsors to incorporate deferred annuities—without violating the previously existing rules—making it very likely that the prevalence of these products is about to explode.
5: The MyRA
The MyRA is a type of retirement savings account proposed by President Obama in his State of the Union address—though the Treasury Department only adopted MyRA regulations late in 2014. Generally, these accounts will allow taxpayers to accumulate a limited level of retirement savings that will be invested in the same type of government savings bonds that are typically only available to participants in the Federal Thrift Savings Plan.
MyRAs will be taxed as Roth accounts, and, like Roths, availability is limited based on the client’s income so that MyRAs will only be available to single taxpayers earning less than $129,000 annually ($191,000 for joint filers). Also like a Roth, annual contributions are limited to $5,500, with an additional $1,000 catch-up contribution for clients aged 50 and older.
2015 is likely to be an eventful year in retirement planning for advisors, as we finally see the rules developed in 2014 put into play—making it more crucial than ever that advisors stay current to maximize value with clients.
Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.
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