Retirement planning can be extremely difficult as individuals are tasked with planning for an uncertain time period. In many ways, retirement planning is like trying to shoot a moving target in the wind. Each and every year new legislation, court cases, and market conditions impact retirement planning. 2014 was no different. The retirement planning market saw an influx of new financial products, the sun setting on certain financial products, a changing investment market, and a variety of legal changes. However, there were five changes that occurred in 2014 that everyone planning for retirement needs to know about: 1) decreased creditor protection for inherited IRAs; 2) introduction of qualified longevity annuities to 401(k)s; 3) a reduction in the number of IRA to IRA rollovers; 4) increased access to annuities in target date funds; and 5) the creation of the myRA. While all of these topics can be fairly complex, a brief overview of each is warranted in this article.
- Decreased Creditor Protection for Inherited IRAs: Overall, qualified retirement accounts, such as 401(k)s, pensions, and IRAs, have good creditor protections. However, in 2014 the Supreme Court cut back on the protections afforded to IRAs. Traditionally, up to $1.25 million are protected from creditors if held within a Roth or Traditional IRA under federal bankruptcy laws. Recently, the U.S. Supreme Court, in Clark v. Rameker, stated that inherited IRAs are not “retirement funds” and, therefore, lack the creditor protections afforded under federal law. This Supreme Court ruling could change how some individuals decide to bequest assets to their heirs because of the lack of creditor protections afforded in the inherited IRA. Instead, certain types of trusts or instruments allowing for a spend-thrift provision might provide better creditor protection if that is a primary concern. While this ruling should not dissuade people from leaving IRAs to their heirs, the lack of creditor protections should be understood by anyone including an IRA in their retirement or estate planning.
- Introduction of Qualified Longevity Annuities to 401(k)s: Annuities have always been an important part of ERISA qualified retirement plans, as the primary form of payment offered to married participants in a defined benefit plan is a qualified and joint survivor annuity. However, longevity annuities, which can be used to help pay for long-term care expenses and protect against outliving your assets, have not had a role inside of qualified plans despite their natural fit with retirement planning. New rules from the Treasury Department changed all of this in 2014, allowing the use of longevity annuities in 401(k)s and IRA markets. Individuals can now hold a qualified longevity annuity contract (“QLAC”) inside of an IRA or 401(k) worth up to the lesser of 25 percent of their account balance or $125,000. The previous concern with a QLAC was that the annuity would not begin payments until long after the individual was subject to the required minimum distribution rules, which kick in once someone reaches 70 ½ years old. Under the new rules, the QLACs are excluded from the retirement account balance when calculating required minimum distributions. This rule change gives people planning for retirement another tool to create a well-developed retirement income plan.
- Reduction in the Number of IRA to IRA Rollovers: Individuals are allowed to receive a distribution from an IRA and roll the funds over to another IRA, or the same IRA, within 60 days to avoid any taxation issues. In prior years, the IRS’s position was that this rule applied to each IRA. This meant if you have five IRAs, you could take a distribution from each IRA and roll it over to the same or another IRA within 60 days without any issues. However, the code was very clear that a rollover from an account was allowed only once in a twelve month period. After the recent Babrow v. Commissioner tax court decision, the 12-month one rollover limitation now applies to all IRAs, meaning that only one 60-day rollover is allowed per 12-month period no matter how many IRAs an individual owns.
- Increased Access to Annuities in Target Date Funds: In another effort to give qualified defined contribution plan participants additional access to a guaranteed income source, the Treasury Department and the IRS issued guidance, IRS Notice 2014-66, allowing expanded access to annuities inside of 401(k) plans. The new rules allow 401(k)s to offer target date funds that include deferred income annuities as the default investment option. The target date fund can include annuities that begin payments as early as retirement or at a much later age. This gives individuals another way to generate some guaranteed retirement income and protect themselves from running out of money later in retirement.
- Creation of the myRA (“my Retirement Account”): A new type of ROTH IRA, the myRA, will be rolling out in 2014 thanks to President Obama and the Treasury Department. This new ROTH IRA will give individuals (earning under $129,000 annually) and married couples filing jointly (earning less than $191,000 annually) that have no access to an employer-sponsored retirement plan the ability to save for retirement through a low cost and tax advantaged savings vehicle. The maximum contribution to the myRA will be the same as the annual ROTH IRA contribution limits, $5,500 per year ($6,500 per year for individuals aged 50 and over). The myRA will be free for employers to make available for employees as they will not administer accounts or contribute money to them. The employee’s contributions will be taken directly out of their payroll through direct deposit and invested in a principal guaranteed variable rate government security. Ultimately, the myRA will give people a low cost way to save for retirement, an easy way to create a starter retirement fund, and help people build better saving habits. Be on the watch for myRA availability in 2015 as the Treasury Department beings to roll out the program.
For anyone seeking more information about how these changes impact your retirement plan read the linked articles and follow up with your financial adviser or other qualified counsel.
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