When distributions are taken from tax-deferred retirement accounts, ordinary income taxes are due. However, sometimes funds may simply need to be moved from one retirement account to another – perhaps because an employee is retiring or switching jobs and chooses to move their 401(k) from their old employer to another 401(k), or to an IRA account, or because a client wishes to work with a new financial advisor and chooses to move all of their accounts over to the new advisor’s firm. Whatever the reason, there are specific rules for different types of money movement that financial advisors should understand to make sure their clients’ accounts are protected from unnecessary taxable distributions.

There are two categories of money movement between retirement accounts: Indirect and Direct transactions. For an Indirect Rollover, the account owner withdraws funds to be moved from the originating account and takes actual custody of the funds. The full amount of funds withdrawn must be deposited into the target account within 60 days. One caveat for Indirect Rollovers from employer-sponsored retirement plans is that there is generally a mandatory 20% withholding for Federal income taxes that the plan sponsor makes directly to the IRS, with the balance of the funds sent to the account owner. This means that, in order to avoid the tax withholding itself to be considered a taxable distribution from the account, the employee must ‘make up’ for the withheld amount by depositing funds from another source into the target account within the 60-day Indirect Rollover window. This withholding does not apply to IRA accounts, including IRA-based employer plans such as SIMPLE IRAs and SEP IRAs. Taxpayers are also limited to one Indirect Rollover between IRA or Roth IRA accounts every 365 days; any additional attempted Indirect Rollovers would be considered an account contribution and can potentially result in a 6% excess contribution penalty annually until corrected.

In addition to Indirect Rollovers, there are two types of Direct methods to move funds between accounts: Direct Rollovers and Direct Transfers. Direct Rollovers move funds between two retirement accounts, but unlike an Indirect Rollover, the funds are never in the account holder’s custody, nor is there any mandatory tax withholding. For Direct Rollovers, funds are moved from the trustee of one account directly to the trustee of the second account (where each account is a different type of accounts, e.g., 401(k) to IRA or vice versa). Direct Rollovers also have no time limit in which the transaction must take place, and there is no limit to how many Direct Rollovers can be done in a given year. While Direct Rollovers are not taxable events, they are reportable events and as such, are reported on Form 1099-R.

Similar to Direct Rollovers, Direct Transfers are made directly between the trustees of each account and don’t involve the account holder ever having custody of the funds being transferred. What distinguishes a Direct Transfer from a Direct Rollover, though, is that the accounts in a Transfer must be ‘like’ accounts (e.g., IRA to IRA, 401(k) to 401(k), etc.). Like Rollovers (including both Direct and Indirect), Like Rollovers, Transfers are not taxable events, but unlike rollovers, they are not reportable events and thus do not require submission of any forms to the IRS. Transfers are also different from Rollovers as they can accommodate funds designated as RMDs.

Ultimately, the key point is that each of the various ways funds can move between retirement accounts has its own distinct set of rules and requirements. Direct Rollovers are generally preferable over Indirect Rollovers, as they are subject to neither the 60-day time limit nor the 20% mandatory withholding, but do require to be reported to the IRS. On the other hand, Transfers do not need to be reported to the IRS and are used when an individual simply needs to change custodians or consolidate accounts involving the same kind of account.

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Sweeping legislative tax or retirement reforms typically happen only once every decade or so, but the final weeks of 2019 brought the second major piece of Congressional action in the past 24 months, as the SECURE Act (along with a series of year-end tax extenders), which was passed in the House this past summer, finally made its way through the Senate and was signed into law by the President. The legislation will have substantive repercussions as financial advisors help clients plan for their retirements for years to come.

In the context of financial advisors and the clients they serve, the first, and probably most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. On the one hand, without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).

Other notable retirement planning changes under the SECURE Act include lifting the restriction on making contributions to a traditional IRA after age 70 ½ (as long as there is earned income to contribute in the first place), and an age increase for the onset of RMDs from age 70 ½ to age 72. However, as was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires. In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).

Beyond the changing or elimination of various age-based thresholds for retirement accounts, the SECURE Act also includes an allowance for a penalty-free distribution up to $5,000 for a qualified birth or adoption, the creation of a Fiduciary Safe Harbor for selecting a “Lifetime Income Provider” (i.e., annuity company) for ERISA fiduciaries (thus assuaging at least some liability concerns around using lifetime income annuities in qualified plans), a substantial increase in the tax credit available to small businesses when establishing a retirement plan (as well as a brand new tax credit for small businesses that adopt an “auto-enroll” provision in their retirement plans), an increase in the allowable auto-enrollment “default” 401(k) plan contribution, improved access to employer plans for long-term part-time workers, and a significant reduction in the barriers to creating and maintaining Multiple Employer Retirement plans (which in theory will help to create economies of scale for lower plan costs when a group of small employers band together to provide a retirement plan)… as well as several other miscellaneous, smaller retirement provision changes.

Other notable non-retirement provisions attached to the SECURE Act include a repeal of the TCJA-introduced Kiddie Tax changes (reverting away from a requirement to use trust tax brackets and back to using the parents’ top marginal tax bracket), adjustments to the medical expense deduction threshold (back to 7.5%-of-AGI again for 2019 and 2020!), expanded provisions for 529 college savings plans to be used for Apprenticeships and (up-to-$10,000 of) student loan repayments, and a series of Tax Extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.

Ultimately, the key point is that, although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 makes numerous updates to the rules around retirement plans in an effort to increase access to employer-sponsored retirement plans, and (hopefully) takes a positive step towards addressing the so-called retirement crisis. But as with other legislation in recent years, what legislation may give with one hand, it takes with the other, and in practice, many financial advisors may spend more time dealing with what is lost under the SECURE Act – in particular, the stretch IRA – than what is gained. At the very least, though, financial advisors will be busy in months ahead as they re-evaluate plans for clients impacted by the new and updated provisions introduced by the SECURE Act.

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Since as early as 1960, our national health expenditures have been steadily increasing. The American Medical Association found Americans paid nearly $3.5 trillion on healthcare in 2017, and expenses continue to rise, with estimated increases in healthcare expenses by the Bureau of Labor Statistics pegged at over 7% since 2016.

To address our country's rising healthcare expenses, the Medicare Modernization Act was signed into law by President George W. Bush in December, 2003.  This law created Health Savings Accounts (HSAs) to encourage individuals to enroll in High-Deductible Health Plans (HDHPs) in an effort to curb overall healthcare spending. In essence, HDHPs incentivize individuals to make healthcare decisions more carefully, with higher out-of-pocket requirements and lower premium expenses (which can often make up for the higher out-of-pocket requirements – especially for healthy individuals!).

Health Savings Accounts (HSAs) offer a further incentive for HDHP enrollment, as they provide a very attractive 'triple-tax' set of potential benefits. The three potential benefits are: 1) tax-deductible contributions, 2) tax-deferred growth, and 3) tax-free withdrawals for qualified medical expenses (although withdrawals made for non-qualified expenses are not tax-free and incur a 20% penalty if made before age 65). After age 65, though, non-qualified withdrawals have no penalty, so the account virtually becomes an “enhanced” IRA which can be used for any purpose but without the requirement of taking annual RMDs.

As with other tax-preferenced savings accounts, there are contribution limits for HSAs, which are based on the type of HDHP coverage an account owner has.  For family HDHPs, annual limits are $7,000 for 2019 ($7,100 for 2020), and for self-only HDHPs, limits are $3,500 for 2019 ($3,550 for 2020). Additionally, HSA owners age 55 and older are allowed to make an annual $1,000 catch-up contribution.

Financial advisors with clients who are married and have mixed health insurance coverage can help their clients understand their actual HSA contribution limits, as these limits depend on the type of plan each spouse has.  For spouses covered by separate self-only HDHP plans, each can contribute up to the maximum, self-only limit to their respective HSAs, but they can’t make up for any contribution shortfalls of the other spouse.

Sometimes, one spouse might have self-only HDHP coverage and the other an "employee-and-children" family HDHP (which does not offer coverage for the employee's spouse). This can be cost-effective for couples with children, as family HDHPs sometime provide for “employee and children” coverage that is less expensive than family plans that include both spouses. In this situation, the spouse with self-only coverage is limited to the self-only HSA contribution amount, and the spouse with family coverage can contribute up to the family limit.  But while the total between spouses cannot exceed the family limit, the spouse with the family plan can make up for any contribution shortfall of the spouse with self-only coverage.

In rare cases, both spouses may each opt for separate HSA-eligible family HDHPs through their employers (perhaps because of different in-network doctors offered by each plan). Again, the total contribution between spouses may not exceed the annual family limit, but in this situation, both spouses have the ability to compensate for any contribution shortfalls of the other, or to simply choose which spouse's HSA it makes sense to fund first.

Financial advisors who have married clients with HSAs, where at least one spouse is under age 65, can employ some strategies to maximize the value of their clients’ accounts.  For example, it may behoove the couple to maximize contributions to the older spouse’s account first in order to reduce the potential exposure to the 20% penalty for non-qualified withdrawals, since the penalty will not apply to the age 65+ older spouse. In addition, using HSA funds from the younger spouse’s account to pay for qualified medical expenses will also result in more funds in the older spouse’s account, available for penalty-free withdrawals for non-qualified expenses.

Ultimately, the key point is that the unique triple-tax benefits of HSAs make them attractive savings vehicles that can be used for expenses beyond medical care (but penalty-free for non-qualified expenses only after age 65). Financial advisors can help their clients with different HDHP coverage options get the most value out of their HSAs by guiding them through their specific contribution rules and choosing how to coordinate withdrawals for qualified and non-qualified expenses from each account in the most tax-efficient manner.

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