Neilley & Co. CPA Blog

New IRA Rules for 2020

Just before Christmas, Congress passed legislation which was promptly signed into law by the President, making significant rule changes pertaining to IRAs and other qualified plans. Following are just a few quick highlights for your general reference:

Starting for tax year 2020, there is no longer an age limit on who may contribute to an IRA. For 2019 and prior, you had to be under age 70-1/2. As you may know, you have until April 15th of one year to make an IRA contribution for the prior tax year. This change does NOT allow those 70-1/2 or older by the end of 2019, to make a 2019 IRA contribution by April 15th of 2020; the contribution must be for tax year 2020.

If you had not yet reached the age of 70-1/2 by the end of 2019, you may now wait until age 72 before being required to take annual minimum distributions (RMDs). If you were already 70-1/2 or older by the end of 2019, you are not affected by this change, and must continue taking your RMDs in 2020 and 2021, even if you aren’t 72 by the end of those years… in short, there was no transitional relief for those already affected by the 2019 rules.

If you inherit an IRA from someone who is not your spouse and passes away in 2020 or later, in general you will now have to withdraw the entire IRA within 10 years. There is no change with regard to spouses or disabled beneficiaries, and in limited other cases. And again, there is no change if the date of death was in 2019 or prior; previous distribution options remain intact.

Parents may now take up to $5,000 out of their IRAs within one year of the birth or adoption of a child. The withdrawal will be subject to income tax as usual, but the early withdrawal penalty will be waived. In addition, the withdrawal may be paid back into the account within one year and treated as a rollover, that is, without reducing the maximum contribution allowed for that year. We caution against availing yourself of this new provision however. In general, most people are already not saving enough for retirement, and withdrawing funds can put you even further behind for your future.

Again, these are just highlights, and there may be further transitional guidance issued by IRS in the coming months (or sadly too late for some people, years). You should talk with us or another tax advisor before making any decisions based on these changes, to be certain the rules will apply to you as we’ve described above, but even more importantly, to decide what is really in your best interests both tax-wise and economically.

Congress is notorious for waiting until the last minute to pass legislation changing tax laws for the year about to wrap up. It is not unusual for them to even delay action to early January… one year they went so far as to make changes in MAY affecting the prior year.

Last week, they really outdid themselves. True to form, they finally took action on typical year end “extenders” to reinstate provisions that technically expired prior to 2019, and President Trump is expected to sign it into law. But this time, some of those changes are put back into place going as far back as tax year 2017!

The main purpose of many of these provisions is to influence taxpayer behavior. For example, the home energy credit is now back again, which is great if it helps you decide to make energy improvements next year. But it’s a little late to help you decide to make that investment before the end of 2019… let alone in 2017 or 2018!

Now, if you already made those improvements in spite of there being no credit available back at the time, you may be able to amend your returns to claim the credit and perhaps get a refund. The problem is, for most taxpayers, the size of that refund may well be more than outweighed by the cost or “hassle factor” of amending returns.

This is just one example, there are many others. One has to wonder if somewhere behind the scenes, some group or another just succeeded in lobbying a windfall for themselves. In any event, as we always do, we’ll be digesting all the particulars of this latest tax opus and be ready to advise our clients how best to take advantage of it going forward.

In the past few months, many businesses and employers nationwide have received “no-match” letters from the Social Security Administration (SSA). The purpose of these letters is to alert employers if there’s a discrepancy between the agency’s files and data reported on W-2 forms, which are given to employees and filed with the IRS. Specifically, they point out that an employee’s name and Social Security number (SSN) don’t match the government’s records.

According to the SSA, the purpose of the letters is to “advise employers that corrections are needed in order for us to properly post” employees’ earnings to the correct records. If a person’s earnings are missing, the worker may not qualify for all of the Social Security benefits he or she is entitled to, or the benefit received may be incorrect. The no-match letters began going out in the spring of 2019.

Why discrepancies occur

There are a number of reasons why names and SSNs don’t match. They include typographical errors when inputting numbers and name changes due to marriage or divorce. And, of course, employees could intentionally give the wrong information to employers, as is sometimes the case with undocumented workers.

Some lawmakers, including Democrats on the U.S. House Ways and Means Committee, have expressed opposition to no-match letters. In a letter to the SSA Commissioner, they wrote that, under “the current immigration enforcement climate,” employers might “mistakenly believe that the no-match letter indicates that workers lack immigration status and will fire these workers — even those who can legally work in the United States.”

How to proceed

If you receive a no-match letter telling you that an employee’s name and SSN don’t match IRS records, the SSA gives the following advice:

• Check to see if your information matches the name and SSN on the employee’s Social Security card. If it doesn’t, ask the employee to provide you with the exact information as it is shown on the card.
• If the information matches the employee’s card, ask your employee to check with the local Social Security office to resolve the issue.
• Once resolved, the employee should inform you of any changes.

The SSA notes that the IRS is responsible for any penalties associated with W-2 forms that have incorrect information. If you have questions, contact us or check out these frequently asked questions from the SSA: https://bit.ly/2Yv87M6

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