The rules and regulations for IRA-based retirement plans can get complicated. But, if you have clients with a significant amount of assets in retirement savings, you’ll want to be prepared to answer unusual IRA questions and help them steer clear of common errors. Here are a few you may encounter, with answers to help you be better prepared.
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Simplifying SIMPLE IRAs
When must I make contributions to a SIMPLE IRA? There are different deadlines associated with making salary deferral contributions as an employee and matching contributions as an employer. While employer contributions need to be made prior to the business’s tax-filing deadline only, employee salary deferrals must be made throughout the year as part of the payroll deduction. There are two different rules to be aware of:
- According to the IRS, deposits must be made no later than 30 days following the month in which the deferrals were withheld from an employee’s salary.
- The Department of Labor (DOL) requires employers to deposit an employer’s salary deferral as soon as administratively possible, but no more than 7 business days after it was withheld.
Generally, plans that benefit employees (except for self-employed individuals and their spouses) are subject to the DOL rule. This ensures that employers won’t sit on employee earnings and gives those employees a reasonable expectation that their money can be invested in a timely manner.
What are the eligibility requirements for employees? The IRS allows employers to restrict SIMPLE IRA plans to employees (including self-employed individuals) who:
- Earned at least $5,000 during any 2 previous calendar years
- Expect to receive at least $5,000 during the current calendar year
Employers can relax these participation requirements, but they can’t make them more restrictive.
When do I need to enroll new employees? Eligibility is based on a calendar year, not a work anniversary; provided eligibility requirements have been established for the plan. By November 1 of each year, employers must send an annual deferral notice and give newly eligible employees 60 days to enroll. Failing to enroll an employee on the correct date can be a costly mistake. As a best practice, check in with clients who are employers before the annual notice period to review these rules and help determine if they have any newly eligible employees.
Unconventional IRA Investment Strategies
Can real estate be held in an IRA? Yes, but it must be bought through a self-directed IRA provider using a custodian that serves this market. It involves purchasing real estate within the IRA, making the IRA the property owner. It’s a complex strategy, however, and may not be offered through your broker/dealer. Even if you can’t advise clients on facilitating this strategy, you can help by ensuring that they understand a few important details:
- Holding real estate in an IRA may cause planning and liquidity issues that can affect things like required minimum distributions (RMDs).
- Owning property can be a substantial investment, and clients should consider how much of their portfolio they’re willing to allocate to it.
- Real estate in retirement accounts can be considered a hard-to-value asset and has become an increased area of focus for the IRS. So, even if your client receives annual valuations and follows the other required rules, it may still raise red flags that lead to an audit.
- There are certain rules pertaining to prohibited transactions and disqualified individuals. For example, clients who own property in an IRA may not use that property for personal use and are prohibited from renting it out to disqualified persons, such as family members.
Custodians serving this market can provide more information on how this works; however, given that they are seeking a client’s business, they may not share the negative aspects of this kind of investment. They may offer insights on how to buy the property, but clients should also consider their exit strategy.
Can a business be funded with IRA money? Yes. Clients can facilitate this using a 401(k) rollover of business startup (ROBS) arrangement. It involves creating a new C corporation and setting up a 401(k) plan for the new business. Clients can then roll over assets from an IRA or previous employer plan into the new 401(K) plan and use those assets to buy the business’s newly issued stock.
Like real estate, clients should understand that shares of their business held within the 401(k) will be considered a hard-to-value asset. In addition, they need to be careful to avoid prohibited transactions. It can be a complex and risky venture, so clients should seek legal counsel before going down this path.
The Complexities of RMDs
How do I handle RMDs when consolidating accounts? If you have clients with several retirement plans, you’ll need to be diligent about keeping track of their RMDs. Any distribution they miss can be a costly mistake—to the tune of a 50 percent penalty on any RMDs not withdrawn. Here are a few details to keep in mind:
- If a client rolls over an account without taking the RMD first, the IRS will consider it an excess accumulation in the receiving account. It will need to be removed as a return of excess plus earnings.
- Roth conversions do not satisfy RMDs even though they are generally taxable. The RMD from an IRA needs to be satisfied prior to conversion.
- Unlike Roth IRAs, Roth 401(k)s and Roth beneficiary accounts are subject to RMDs. Not taking an RMD on either of these will result in a 50 percent penalty.
- A Roth 401(k) RMD should be satisfied before rolling it over to a Roth IRA. A good way to avoid issues is to complete the rollover before the year in which the client needs to begin taking RMDs.
Can I take all my RMDs out of one account? Understanding which distributions can be aggregated together to satisfy RMDs (and which ones can’t) is critical. Remember, if clients miss just one, they will owe a 50 percent penalty on the amount missed. Here’s a breakdown of what can and can’t be done:
- IRA RMDs can be aggregated together, but IRA distributions can’t be used to satisfy other retirement plan RMDs, such as 401(k)s and 403(b)s.
- 401(k) RMDs can’t be aggregated with any other RMD (this includes other 401(k)s).
- 403(b) RMDs can be aggregated only with other 403(b)s, not with any other retirement plan or account.
- IRA RMDs can be aggregated with each other, but if a client has an annuity IRA, once annuitized, the payments can’t be used to satisfy other RMDs. (This may differ in the first year only.)
- BDA IRAs can be combined only if the original IRA owner is the same person, and BDA IRAs can’t be aggregated with traditional IRAs.
Cementing Your Role as Trusted Advisor
With so much of clients’ savings tied up in retirement accounts, it’s important that you can answer the unusual IRA questions that may come up. It can ease their concerns about what they’re doing and help avoid costly mistakes. And, in the long run, it will help solidify your role as a trusted advisor and create a better client experience.
What unusual or challenging IRA questions have you come across? Do you have additional IRA investment strategies? Please share your thoughts below!