Through IRS guidance and court decisions, a number of changes have been made affecting IRAs and other qualified plans over the past year. Some of these changes are positive and present planning opportunities. Others are negative and represent potential traps to avoid. Altogether, they warrant being part of a 2015 tax review with clients.
Notice 2014-54 -- Taxable and Non-taxable Distributions. Internal Revenue Service guidance in Notice 2014-54 now permits a distribution from a 401(k), 403(b) or 457(b) account to have the taxable and non-taxable portions of the distribution directed to separate accounts.
This applies whether it is a partial distribution or a total distribution and whether it is a direct rollover or a 60-day rollover. Plan sponsors and administrators may need to revise plan language and election forms to reflect this change. The changes are effective Jan. 1, 2015; however, a participant may apply the rules on or after Sept. 18, 2014.
T.D. 9673 -- Longevity Annuities. Under final IRS regulations in Treasury Decision 9673, a defined-contribution plan or IRA participant who obtains a qualified longevity annuity contract with account assets may exclude the QLAC from the computation of required minimum distributions from the account. This permits IRA holders and defined-contribution plan participants to obtain an annuity to help ensure that they will not outlive their RMDs without adversely affecting the RMDs from the account before the beginning date of the QLAC.
In order to be a QLAC, the annuity contract must state that it is a QLAC, it must start on or before age 85, and the aggregate premiums paid may not exceed $125,000, adjusted for inflation, or 25 percent of the plan's account balance. There are a number of additional requirements that a QLAC must meet with respect to beneficiaries and restrictions on additional features. A QLAC may have a return-of-premium feature. The regulations apply to QLACs purchased on or after July 2, 2014, and to existing annuity contacts converted to QLACs.
Notice 2014-66 -- Deferred Annuities. The IRS has also issued guidance in Notice 2014-66permitting 401(k) plans to offer deferred annuities through target date funds. TDFs are funds that automatically shift to a more conservative investment mix as the plan participant ages. The deferred annuity can also be a default option under the plan.
PLR 201423043 -- Spousal Rollovers. In Private Letter Ruling 201423043, the IRS permitted a surviving spouse to roll over two Roth IRAs, which were payable to a trust controlled by her, into her own Roth IRA. Private letter rulings may not be relied upon as official guidance, but they may give an indication of how the IRS might view a similar situation.
MyRAs. Following an announcement early in 2014, the Obama administration is expected to roll out MyRAs in 2015. Offered under the government's savings bond issuance authority, employees would be able to make small payroll deductions into MyRAs until reaching a total of $15,000 or a period of 30 years. The accumulated sums could then be rolled into a Roth IRA. MyRAs would be invested in government bonds, so they would represent a relatively safe investment with relatively low returns. Employers would have to choose to offer MyRAs to their employees.
Bobrow and Announcement 2014-22 -- IRA Rollovers. The Tax Court in Bobrow, TC Memo. 2014-21, held that, in contrast to the IRS guidance in Publication 590, a taxpayer is limited to one 60-day rollover per year for all IRA accounts under the statutory language of Code Sec. 408(d)(3)(B), rather than one 60-day rollover per year for each IRA account. The IRS in Announcement 2014-32 stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after Jan. 1, 2015. The change does not affect direct rollovers, rollovers from a defined-contribution account to an IRA, or Roth conversions. The IRS also plans to update Publication 590 to reflect the new interpretation.
Clark v. Rameker -- Inherited IRAs. The Supreme Court in June of 2014 issued a holding in Clark v. Rameker that found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code. The decision primarily impacts non-spousal beneficiaries, since spousal beneficiaries would be able to roll the funds into an IRA account in the spouse's own name.
IRA Distributions to Charity. One of the expired provisions that still had not been extended as of this writing was the ability of taxpayers over age 70-Â½ to make IRA distributions up to $100,000 directly to a charity and avoid taking the distribution into taxable income. Congress may by now have retroactively extended this provision for 2014 and through 2015. When Congress last extended this provision at the end of 2012, special language was inserted to permit IRA distributions in December 2012 to be treated as if made directly to a charity if a charitable contribution was made by the end of January 2013. The provision also permitted an IRA distribution to a charity in January 2013 to be treated as if made on Dec. 31, 2012. Taxpayers and tax practitioners should be on the lookout for similar special language in any extension of this provision at the end of 2014.
2015 Budget Proposals. President Obama's 2015 budget called for several changes in the treatment of qualified retirement plans and IRAs. One would restrict the distribution period for inherited IRAs to five years. Another would cap the amount in tax-deferred retirement accounts to an amount that can produce an annual income of no more than $205,000, adjusted for inflation. Another would impose minimum required distributions on Roth IRAs. None of these proposals have yet been acted upon, and they are unlikely to be taken up in stand-alone legislation in 2015. However, proposals such as these could enter into longer-term discussions about reforming tax-advantaged retirement savings as part of fundamental tax reform.
Tax practitioners will want to check with those of their clients who might be impacted by these changes. The longevity annuity, deferred annuity, and taxable and non-taxable split of distributions may be very helpful in retirement planning for certain clients.
The new treatment of IRA rollovers and inherited IRAs will warrant cautionary planning with the use of 60-day rollovers and the designation of non-spousal IRA beneficiaries. Tax practitioners will also want to monitor developments on IRA distributions to charities, the new MyRA, and possible changes to tax-qualified retirement plans as part of tax reform.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, CCH.
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