For most federal employees, the question of how to save, invest, and spend for retirement is one of their biggest financial challenges. Congress has not made it any easier to meet this challenge. Over the years, Congress has passed little-but-insufficient legislation upon legislation, leaving the IRS and retirement savers facing a maze of confusing tax regulations.
This column provides answers to the most frequently asked questions about Thrift Savings Plans (TSPs) and Individual Retirement Arrangements (IRAs).
read: End-of-2023 and pre-2024 TSP movements for federal employees to consider
1. If I inherit a parent or grandparent’s TSP account or IRA, should my child or grandchild take required minimum distributions (RMDs)?
Generally, non-spouse beneficiaries of TSP accounts (this includes both traditional and Roth TSPs) must withdraw their TSP inheritance within five years of the TSP participant’s death.
Beneficiaries of traditional TSP accounts pay the full amount of federal income tax on the amount and, in most states, the full amount of state income tax. Beneficiaries of Roth TSP accounts do not pay federal and state income taxes when they withdraw their inherited Roth TSP accounts.
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TSP participants who choose to directly rollover or transfer their entire TSP account to an IRA (traditional TSP to traditional IRA, Roth TSP to Roth IRA) receive a You can give flexibility to the beneficiaries of your IRA account. I transferred my TSP account.
Therefore, it is assumed that a retired TSP participant rolled over their entire TSP account directly into an IRA at some point in their retirement. In other words, a traditional TSP is rolled over to a traditional IRA (a “rollover” traditional IRA). The Roth TSP was rolled over to a Roth IRA (a “rollover” Roth IRA).
Below are the rules that apply to non-spouse beneficiaries of “rollover” Roth IRAs.
• If the owner of a “Rollover Roth IRA” dies before January 1, 2020, the beneficiary must receive annual payments. However, these annual payments (based on the beneficiary’s life expectancy) are often small, can last for decades, and are not subject to income tax. Therefore, forced inherited Roth IRA payments are sometimes referred to as tax-free “stretch” Roth IRAs.
• If a “rollover Roth IRA” owner dies after December 31, 2019, the beneficiary can withdraw the entire inherited Roth IRA account without annual RMDs for 10 years. This means that the account assets can grow tax-free during his 10 years.
Beneficiaries of “traditional IRA rollovers” face a more complex issue.
• If the owner of a Rollover Traditional IRA dies before January 1, 2020, the beneficiary is typically required to receive annual payments called required minimum distributions based on the beneficiary’s life expectancy. there is. Payments are fully taxable. There are no RMD exemptions for 2023.
• If the “rollover traditional IRA” owner dies after December 31, 2019 and was already required to take an IRA RMD (owner was born before July 1, 1949); Beneficiaries typically have 10 years to withdraw their inherited IRA accounts.
Additionally, payments must be made annually during years 1 through 9. This often results in smaller withdrawals before a final larger payment is made at the end of the 10th year. From years 1 to 9, you are not prohibited from withdrawing more than you need, but you are not prohibited from withdrawing more than you need.
Changes in the law have created confusion surrounding RMDs for these beneficiaries. Therefore, the Internal Revenue Service has waived these payments for 2021, 2022, and 2023.
If the Rollover Traditional IRA owner was not required to take an IRA RMD, the Rollover Traditional IRA beneficiary would not be required to receive payments annually from Years 1 through 9. However, from year 1 he may want to make some withdrawals by year 9 to avoid ending up with a large tax charge in year 10 as a result of making a large withdrawal .
More lenient rules apply to some heir groups, such as minor children (not grandchildren) of traditional IRAs where the owner dies after December 31, 2019. For more information, see IRS Publication 590-B (Distributions from Individual Retirement Arrangements).
2. Can a Traditional IRA Rollover or Roth IRA Rollover owner continue to contribute to a Traditional IRA or Roth IRA?
The answer is “yes” if the “rollover IRA” owner has income from salary/wages or net self-employment income that is at least equal to the IRA contribution.
If a traditional IRA owner reaches the required start date (RBD of age 73 starting January 1, 2024), the traditional IRA owner must continue to take IRA RMDs each year.
To contribute to a Roth IRA, the Roth IRA owner’s adjusted gross income (AGI) must be below certain limits. For more information, see IRS Publication 590-A (Contributions to Individual Retirement Arrangements). This AGI limit is in addition to the earned income requirement.
3. What are the “widow/widower” tax penalties and which couples are affected by them?
A “widow/widow tax penalty” occurs when one spouse dies, and the surviving spouse typically transitions from joint-filing tax status to single-filing tax status in the year following the spouse’s death. You need to switch. As a result of this change, lower taxable income levels will be subject to higher marginal tax rates.
However, if both spouses own a traditional IRA and both meet the required start date and are required to take an IRA RMD, the RMD will not be reduced if the first spouse dies.
In fact, if the surviving spouse is designated as the sole beneficiary of the deceased spouse’s IRA, the surviving spouse’s RMD will increase, especially as the RMD increases with age. Some tax advisors say it’s not uncommon for a surviving spouse’s top federal marginal tax rate to jump from 12% to 22%, or from 24% to 35%.
The solution to the “widow/widow tax penalty” is for one spouse to leave all or part of the traditional IRA to other beneficiaries rather than to the other spouse. This may reduce the surviving spouse’s marginal tax rate. Of course, leaving a traditional IRA to other beneficiaries assumes that the surviving spouse has sufficient income to survive without the deceased spouse’s traditional IRA.
4. How do large traditional TSP and traditional IRA balances result in large RMDs and affect my federal tax bracket and monthly Medicare Part B premiums? How can I manage this? Or?
The larger your traditional TSP and traditional IRA balances, the larger your RMDs from both accounts, resulting in a higher tax bracket and higher monthly Medicare Part B premiums.
To address this, it is recommended that you seek the assistance of a tax professional. One suggestion is to perform a Roth IRA conversion to reduce the balance between your traditional TSP account and your traditional IRA account.
Ideally, this Roth IRA conversion process begins when an individual is in their early 60s, before enrolling in Medicare at age 65 (if retired). However, the conversion to a Roth IRA must be at least 5 to 10 years before her Required Start Date (RBD), which would be her age 73, which begins on January 1, 2024.
It is permitted to make Roth IRA conversions while taking RMDs. However, annual RMD cannot be converted. This means the converted amount will be added to his RMD, potentially pushing the individual into a higher federal marginal tax bracket.
Another suggestion is for individuals age 70.5 and older to make qualified charitable distributions (QCDs). A QCD provides tax relief and removes pre-tax traditional IRA funds without creating taxable income that could increase Medicare Income Related Monthly Adjustment Amount (IRMAA) or other taxes.
5. Can a FERS-eligible employee’s agency automatic 1 percent contribution and agency matching contribution be contributed to a Roth TSP?
One provision passed into law as part of the SECURE Act 2.0 allows employers that offer qualified retirement plans (such as 401k retirement plans) to make contributions to employees’ Roth accounts. As of 2023, a portion of private employer contributions are deposited into the employee’s Roth 401(k) account.
However, TSP has decided not to allow FERS-eligible employees’ agency matching contributions and 1 percent of total contributions to be automatically deposited into the employee’s Roth TSP account.
Regardless of which TSP account a FERS-covered employee contributes to (Traditional TSP, Roth TSP, or a combination of both), employee agency TSP contributions are always credited to the employee’s traditional TSP account. Masu.
About Edward A. Zurndorfer
