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The rules for your retirement savings accounts were relaxed in 2020. You have more time to deposit money, can withdraw money prematurely without penalty, and the required minimum distribution rules (RMD) for people over 72 have been completely removed.
July 15 deadline for contributions 2019 (extended from April 15)
July 15, 2020 is the deadline for submitting contributions for 2019 to your IRA, Roth IRA, your Health Savings Account (HSA) or your Coverdell Education Savings Account. It is also the SEP IRA deadline for sole traders and independent contractors who submit their income in accordance with Appendix C with their personal tax return. The typical deadline for contributions from the previous year is April 15th. However, these have been extended by the IRS in response to the pandemic along with the extension of the personal tax return deadline. While you can extend your personal tax return by October 15th by submitting an application to the IRS (Form 4868), you cannot extend your 2019 IRA, Roth IRA, HSA, or Coverdell contributions beyond July 15th If you are self-employed and would like to contribute to a SEP IRA for 2019, you can extend this contribution period if your company return is also extended. For sole traders, the deadline for the company is your personal tax return, which is now July 15, 2020, but can be extended until October 15, 2020.
IRA, SEP IRA and HSA contributions are great last-minute tax savings. A self-employed person could generate more than $ 60,000 in tax deductions by maximizing SEP IRA and HSA contributions by July 15. For example, a self-employed person with a self-employment income of $ 250,000 could contribute 25 percent of his income (the SEP IRA contribution rule) up to a maximum of $ 56,000. Because of their income, they could contribute a maximum of $ 56,000. And if they had a high deductible health insurance plan (HDHP) in 2019, they could also contribute $ 7,000 (family, $ 3,500 if they're single) to their HSA. They could end up generating $ 63,000 in tax deductions at the last minute. Assuming the person is in a 35 percent federal and 10 percent federal tax bracket, these two last-minute contributions would save them over $ 28,000 in taxes. You will also see their SEP IRA grow deferred tax, and their HSA will grow and come out tax-free on medical expenses.
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Many self-employed people without employees opt for a Solo 401 (k) instead of a SEP IRA because it offers more advantages. However, the Solo 401 (k) must have been set up in 2019 to make contributions in 2019. The SEP IRA, on the other hand, has a great advantage for last-minute people who still make contributions for 2019, since it can be set up and financed by the key date 2019, July 15, 2020. The contribution limits for 2019 for the accounts you can use can still contribute for 2019 are as follows …
COVID-19 penalty-free distributions
The CARES law gave us stimulus checks and PPP loans, but also created unpunished early distributions of IRAs and 401 (k) s for those who are financially affected. These distributions can be made up of 401 (k) s, IRAs, SEP IRAs, simple IRAs, pension plans, 457 plans and 403 (b) plans. These COVID-19 distributions are exempt from the usual 10 percent early withdrawal penalty if you withdraw money from any of these plans before you reach 59½ years of age. Congress decided to unlock these funds and remove the penalty people would face if they had access to their own retirement assets.
In order to qualify for a COVID-19 distribution, the account holder must have had “adverse financial consequences” due to the pandemic. This is a broad definition that the account holder reports himself and asserts against his account manager. Adverse financial consequences include quarantine (most states now have shelters), vacation or discharge, the closure or impairment of your business, or the reduction in working hours or inability to work due to changes and availability of childcare (closed schools, closed childcare facilities) . The rule also includes all people who have been diagnosed with COVID-19 or whose spouse or relatives have been diagnosed with the virus. The limit for unpaid COVID-19 distributions is $ 100,000 and can be claimed until December 31, 2020.
An additional benefit of the COVID 19 distribution is that any tax due on the distribution can be spread over three tax years. This three-year rule helps to reduce the tax burden of a distribution, since these amounts would otherwise be included in your gross income in the reporting year. However, if the distribution is a COVID-19 distribution, you can spread the income and tax liability over three years (2020, 2021 and 2022).
You can also repay the money to the same account or to an IRA of your choice within three years. You can avoid the taxes owed and repay this money to a tax-efficient account for future investments. The IRS has issued guidelines on how to get back any taxes that you may pay on the distribution if you return the funds in later years. For example, if in 2022 you paid back a COVID-19 distribution for 2020 to an IRA, but you already paid a third of it in your tax return for 2020 and another third for your tax return for 2021, then it is you who can file your tax returns for Change 2020 and 2021 to get a tax return. The aim of the congress was to grant those who needed impunity access, at the same time to lower the tax on the distribution and to give investors up to three years to get the money back. It is a careful balancing act, but it is one. Congress has done an admirable job in drafting the provisions of the retirement account in the CARES Act.
No required minimum distributions in 2020
Individuals with IRAs, SEP IRA, 401 (k) s and other employer plans must deduct certain required minimum distributions ("RMD") from these accounts at the age of 72. The previous age limit was 70½ years, but was initially raised to 72 in 2020 with the kind permission of the SECURE Act, which was incorporated into the law at the end of last year. The good news for those over 72 who need to take RMD is that they don't have to do it for 2020. The basic principle is that it would be unwise to force someone to sell their pandemic investments during their account, even though the markets are low. Values are low. The advantage for the 72 and older is that they skip RMD for 2020 if they want to. You can keep your entire account invested and sell it until 2021 and then take your annual RMD.
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Strategic steps can be taken in 2020 given the favorable rules for pension accounts in the CARES Act and due to executive measures by the IRS. Regardless of whether you use a 401 (k) or an IRA to survive financially, or whether you want to contribute to retirement, health, or educational savings accounts in late 2019, the 2020 laws offer you more options and flexibility than years ago .