With the Internal Revenue Service’s recent release of final regulations on Roth distributions, it might be a good time to summarize the several changes that have been made either through legislation, IRS action, or court decisions affecting qualified retirement plans over the last year or so.
In Notice 2014-34, the IRS announced that, effective Jan. 1, 2015, the taxable and non-taxable portions of distributions from 401(k), 403(b) and 457(b) plans could be directed into separate accounts. This change would permit the taxpayer to roll only the taxable account back into an employer plan of a new employer and then do a Roth conversion of the non-taxable account, minimizing the tax consequences of the conversion. Distributions that are scheduled to be made at the same time are treated as a single distribution without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations. The changes were effective Jan. 1, 2015, but a participant could elect to apply the rules on or after Sept. 18, 2014.
In Treasury Decision 9769, announced in May 2016, the IRS released final regs with respect to making similar disbursements from designated Roth accounts to multiple destinations. For distributions made on or after Jan. 1, 2016, the final regs remove the separate distributions rule. For earlier distributions, the final regs add a sentence that provides that a separate distribution rule applies to distributions made prior to Jan. 1, 2016, unless a taxpayer elects not to apply that rule with respect to a distribution made on or after Sept. 18, 2014. This gives taxpayers the flexibility to choose how to split distributions between traditional and Roth IRAs.
In Treasury Decision 9673, the IRS clarified that a defined-contribution plan participant or an IRA participant who obtains a qualified longevity annuity contract with account assets may exclude the QLAC from the computation of required minimum distributions. A QLAC contribution must be limited to the lesser of 25 percent of the December 31 account balance from the prior year or $125,000, indexed for inflation in $10,000 increments. The income start date must be no later than one month past the birth month at age 85. No variable or index annuities are permitted, although a QLAC may include certain inflation adjustments. The change applies to QLACs purchased on or after July 2, 2014.
401(k) plans are permitted to offer deferred annuities through target date funds.
Following the Bobrow decision by the Tax Court (TC Memo 2014-21), the IRS modified its guidance on 60-day IRA rollovers to permit only one 60-day rollover per year for all IRA accounts, rather than to allow one 60-day rollover per year for each IRA account, as was permitted in prior guidance. The Bobrow court concluded that the prior IRS position was contrary to the statutory language, and the IRS decided to go along. The change is currently in effect.
The Supreme Court in Clark v. Rameker determined that inherited IRAs are not retirement assets and therefore not subject to creditor protection. This would not appear to apply to inheritances from a spouse where the spouse is entitled to roll the funds into their own IRA, rather than to an inherited IRA. This clarification from the Supreme Court should encourage IRA owners to review their IRA beneficiaries and consider whether a change is warranted to perhaps provide greater creditor protection.
IRA DISTRIBUTIONS TO CHARITY
The tax provision permitting IRA distributions by persons over age 70-½ to be made directly to a charity without taking the distribution into taxable income was made permanent by the PATH Act in December 2015. IRA account holders over age 70-½ will no longer have to hold up required minimum distributions to see if Congress will act to extend this tax provision, as they have had to do on several occasions in the past.
ROLLOVERS TO SIMPLE PLANS
The PATH Act also permitted participants in a qualified retirement plan, tax-sheltered annuity plan, or governmental deferred-compensation plan to roll over amounts from these plans into a SIMPLE IRA. This is now similar to the rollovers that are permitted into rollover IRAs. The change applies to contributions made after Dec. 18, 2015.
MyRA accounts were announced by President Obama a couple of years ago as a means to provide a risk-free retirement vehicle for lower-income persons. The program permits a payroll deduction for small contributions, as little as $25 per month, to be placed in a MyRA and invested in government bonds. The maximum amount that can be accumulated in a MyRA is $15,000. After what the administration described as a successful trial period in 2015, it has officially rolled out the program in 2016. An employer has to elect to offer MyRAs to its employees, but it is not clear how many will do so. The administration structured the program to be similar to the payroll deduction program for purchasing government savings bonds, which was popular during and after World War II. Government bonds currently offer a relatively low return, but the risk-free aspect may attract the interest of some lower-income workers if employers decide it is worthwhile to offer them.
The majority of these retirement plan changes are beneficial to taxpayers, with the exceptions being the two court decisions involving the number of 60-day IRA rollovers and the exposure of inherited IRAs to creditors.
Taxpayers and their advisors will want to review these rules to take maximum advantage of the new flexibility that they permit but also to be aware of the new restrictions and risks. On the whole, these changes represent a plus for taxpayers and new planning opportunities.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst at Wolters Kluwer Tax & Accounting.
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