Federal & State Laws That Can Impact Your Retirement Assets

Highlights of modern laws that impact retirement, healthcare, taxes and more

The Deficit Reduction Act: Effective 2006

This Act extended the ‘Look Back’ period for asset transfers from 36 months to 60 months.

It was an effort by the Bush administration to reduce the Federal Medicaid liability in anticipation of the huge wave of Baby Boomers now reaching retirement age. Co-Partnered with State Governments, Medicaid is now the leading funder of nursing care and its costs have sky rocketed in recent years as many more Americans are now reaching retirement age and need Care & Assistance to pay for it.

Over half of all Americans who reach age 65 will need some form of nursing care during their lives. The average time line (including all forms of care) is currently four (4) years, with an average annual cost now exceeding $75,000 nationwide. Annual costs for the most ‘structured’ care are already above $100,000.

There are ways to reposition your assets but it takes expert legal help that specializes in Medicaid Planning. Most assets are ‘countable’ and must be spent on your care before you are eligible to receive assistance if not properly repositioned 60 months prior to applying for Medicaid. All Bank accounts, Brokerage accounts, IRA’s, Life Insurance cash value and Pensions are ‘countable’ assets, as are Real Estate and other personal property. Very few financial advisors and their legal teams have the Medicaid expertise to correctly assist you in repositioning your assets. If not done properly and correctly, you could be in trouble.

Be wary of advisors who lack this specialized knowledge, as experience has shown that many who make the claim, don’t have the knowledge and seem more interested in maintaining their ongoing monthly income stream of 12b1 fees for ‘managing’ your accounts; than actually protecting your life’s work to pass onto your loved ones, protect your estate or leave a legacy.

The Pension Protection Act: Effective January, 2010

This Act grants you significant tax breaks on retirement accounts (IRA’s, 401k’s, 403b’s, SEPS, Etc.) when you withdraw those funds to pay for nursing care expenses.

This Act also applies to the new limited number of ‘Linked Benefit’ plans which either pay out multiple times your deposit in tax free benefits to pay for your nursing care if needed, or much more than you deposit in a tax fee death benefit to your loved ones if not; which means your investment in one of these new ‘Hybrid’ Life Insurance plans is never lost from your estate; they are either/or, not either/none.

These new plans must be structured correctly to have your Required Minimum Distribution (RMD) satisfied by the nursing care benefit of these Guaranteed payout plans.

Long Term Care ‘State Partnership’ Plans: Effective January, 2012

These new ‘State Partnership’ policies are an attempt by the States to reduce their Medicaid liability by encouraging you to purchase your own nursing care policy. Whatever benefit you purchase is matched by the State, should you exhaust your own policy benefits paying for your care. Without one of these ‘Partnership’ compliant policies, or other nursing care policy, you would be forced to ‘Spend Down’ virtually all of your assets before qualifying for Medicaid. Most participating States have reciprocity agreements, allowing you to move out of State without losing this extremely valuable benefit. Eligible policies may be exchanged for a ‘Partnership’ compliant policy as far back as 02/08/2006 purchase date.

New federal law Could allow pension cuts, December 2014 Spending Bill

The measure would, under certain conditions, allow cuts to what are known as multi-employer pensions. These are union-run plans that cover workers who may have had a variety of different employers in a given industry.

After hits from the 2008 Wall Street crash and declining union membership, some of these plans are underfunded and won't have the money in the long run to meet their obligations. Some of the unions, such as the Teamsters, lobbied for the amendment since they may have to make the cuts to stay solvent. About 150 such plans nationally could be affected.

Fortunately, there are ways to secure your pension with guaranteed lifetime income benefit, locked in tax deferred growth.

Veterans Special Aid and Attendants Pension: Freedom isn’t Free-Thank You Veterans! *

Originally funded with Billions from Congress during the Korean War, and enhanced during Desert Storm, this benefit is not new, but most Veterans we meet at the Asset Preservation Workshops we provide at VFW halls and elsewhere have never heard of it. A Veteran or their spouse can be eligible for over $2000 per month in nursing care benefits above and beyond any service-related disability benefits.

Unlike Medicaid Planning, there is no ‘Look Back’ period to qualify for this valuable Veteran’s benefit. Your assets must be properly repositioned into an exempt status by a financial advisor who knows the rules before you apply or you will be turned down by the VA. You may then be able to qualify for both Medicaid and this valuable VA program to cover the entire cost of your future nursing care needs.

Hoping for the best, but planning now for any future changes, greatly reduces anxiety and can avoid significant heartache later should a life changing event happen in the future. Prepare now to ensure your protection.

Be Advised*: We have encountered ‘lawyers’ and others in your community who will try to charge you a ‘fee’ to fill out your VA application forms for this program; that is illegal! The State VFW has service officers who will gladly help you fill out these VA forms. That service is provided free of charge. Please see advisory below from Title 19 RCW*.

*This is not sponsored by, or affiliated with, the United States Department of Veterans Affairs, the Washington State Department of Veterans Affairs, or any other congressionally chartered or recognized organization of honorably discharged members of the Armed Forces of the United States or any of their auxiliaries. Products or services that may be discussed are not necessarily endorsed by those organizations. You may qualify for benefits other than or in addition to benefits discussed at this event.          -WA Senate Bill 6208

2017 Tax Cuts and Jobs Act (TCJA)

President signed the Tax Cuts and Jobs Act (TCJA) into law on Dec. 22., 2017, bringing sweeping changes to the tax code. The changes were felt depended on factors like income level, filing status, and deductions. Those living in a high-tax state with soaring property values may have paid more in taxes in 2019 and on.

For high net-worth individuals, banks, and other corporations, the tax reform gave significant and permanent tax cuts to corporate profits, investment income, estate tax, and more. Financial services companies stood to see huge gains based on the new, lower corporate rate (21%), as well as the more preferable tax treatment of pass-through companies.[1] Some banks said their effective tax rate would drop under 21%.

The law retained the old structure of seven individual income tax brackets, but in most cases, it lowered the rates. The top rate fell from 39.6% to 37%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%.10 The lowest bracket remained at 10%, and the 35% bracket was also unchanged. The income bands that the new rates applied to are lower, compared to 2018 brackets under current law, for the five highest brackets.

The changes are temporary, expiring after 2025, as is the case with most personal tax breaks included in the law.

Retirement Plans and HSAs

Health savings accounts (HSAs) were not affected by the law, and the traditional 401k contribution limit in 2019 increased to $19,000 and $25,000 (a $6,000 catch-up) for those aged 50 and older.19 The law left these limits unchanged but repealed the ability to recharacterize one kind of contribution as the other, that is, to retroactively designate a Roth contribution as a traditional one, or vice-versa. Since the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in Dec. 2019, though, people can now contribute to their individual retirement accounts (IRAs) past the age of 70?.[2]

Estate Tax

The law temporarily raised the estate tax exemption for single filers to $11.2 million from $5.6 million in 2018, indexed for inflation. This change will be reversed after 2025.

We are enjoying historical low taxes. It is literally a “Tax-Sale” with taxes automatically scheduled to increase in just a few short years. We are enjoying historical low taxes. It is literally a “Tax-Sale” with taxes automatically scheduled to increase in just a few short

 2019 The Further Consolidated Appropriations Act (SECURE)

The federal government spending bill passed by Congress on Thursday repeals three health care taxes that were originally enacted as part of 2010 health care reform legislation, makes many changes to retirement plan rules, extends several expired tax provisions, provides disaster tax relief, and repeals the provision that taxed exempt organizations when they provided parking to their employees.

Health care taxes

The three repealed health care taxes are on certain high-cost employer health plans, popularly called the Cadillac tax; the medical device excise tax; and the annual fee on health insurance providers from the Patient Protection and Affordable Care Act, (Obamacare). All three taxes had previously been postponed or suspended previously.

Retirement plan changes

The bill also incorporates the text of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed the House of Representatives in May but was never voted on by the Senate.

The bill is designed to encourage retirement savings in various ways and to simplify administrative requirements in order to make it easier for employers to offer retirement plans.

The bill introduces many other changes. Among them, the bill:

Increases the age after which required minimum distributions from certain retirement accounts must begin to 72 (from 70?);

Modifies requirements for multiple-employer plans to make it easier for small businesses to offer such plans to their employees by allowing otherwise completely unrelated employers to join in the same plan;

Reduces Pension Benefit Guaranty Corporation premiums for certain multiple-employer defined benefit plans of cooperatives and charities;

Allows penalty-free distributions from qualified retirement plans and IRAs for births and adoptions;

Makes it easier for long-term, part-time employees to participate in elective deferrals;

Allows consolidated filings, Annual Return/Report of Employee Benefit Plan, for similar plans;

Allows certain home health care workers to contribute to a defined contribution plan or IRA; and

Requires beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts within 10 years.

The bill repeals the maximum age for IRA contributions (currently 70?). It also amends the code to reduce the amount of deductible charitable IRA contributions allowed to taxpayers over 70? by the aggregate IRA contribution deductions allowed to them after they turn 70?.

The bill allows certain expenses associated with registered apprenticeship programs to count as qualified higher education expenses for purposes of 529 Education Plans.

The failure-to-file penalty is increased to $435.

The new kiddie tax from the Tax Cuts and Jobs Act (TCJA), is repealed.

The three taxes, which were enacted to fund the health care reform known as Obamacare, have now been repealed.[3]

2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act

For Retirees who rely on Required minimum distributions (RMDs), they will be happy to know that RMD’s are suspended for 2020 Including those for inherited Individual Retirement Accounts (IRAs) and traditional IRAs of those over age 70?. Think carefully about whether to take advantage of this suspension. If the effects of the pandemic dropped you into a lower tax bracket, it might make sense to take the RMD (and perhaps a bit more) out of the IRA this year while you’re in a lower tax bracket. Considerations of your market risk and loss during this year are also important to calculate and account for.

If you already took the 2020 RMD, you will have to include it in gross income and pay taxes on it. But you might have some options. You have up to 60 days to return a distribution to an IRA or deposit it in another qualified retirement account without owing taxes on it. You also might convert the amount into a Roth IRA.

Since the tax return filing deadline for 2019 income tax returns was extended to July 15, the deadline for making a 2019 contribution to an IRA also is extended to July 15, 2020.[4]

Stay up to date on the State and Federal changes to Senior Law Benefits by contacting Mike at [email protected] or calling him at (425) 243-4521

[1] United States Congress. "H.R. 1, 115th Congress," Page 43. Accessed Oct. 9, 2019.

[2] Floyd, D., (2020, January, 20) Explaining The Trump Tax Reform Plan. www.investopedia.com/taxes/trumps-tax-reform-plan-explained/

[3] Nevius, A. M.; J.D., (2019, December 19). Year-end government spending bill contains many tax provisions. www.journalofaccountancy.com/news/2019/dec/tax-provisions-new-government-spending-bill-201922651.html

[4] Carlson, B., (2020, March 28). IRA And Retirement Plan Changes In The CARES Act. www.forbes.com/sites/bobcarlson/2020/03/28/ira-and-retirement-plan-changes-in-the-cares-act/#5e4324f334f5