Tax Reform: Retirement Plan Provisions

The Tax Cuts and Jobs Act covers a wide variety of tax changes. In the retirement plan world, before the final bill was passed, there was a lot of talk about reducing contribution limits and/or requiring Roth Deferrals as opposed to pre-tax deferrals. Thankfully, neither of these proposals are in the final approved Act. There are however a few changes.

  1. Re-characterization of Roth IRA contributions:
    1. Traditional contributions can still be converted to Roth.
    2. Roth contributions can still be converted to traditional.
    3. New Rule: Once you convert traditional to Roth, you cannot then re-characterize back to traditional.
  2. If a plan provides for hardship distributions, there are two changes:
    1. Old Rule: Participant cannot defer for six months after taking a hardship distribution.
    2. New Rule: Participant can continue to defer.
    3. Old Rule: Hardship distributions can only come from amounts contributed by the employee.
    4. New Rule: Hardship distributions can also come from employer contributions and earnings from all sources of contributions.
  3. Extended period to rollover plan loan offset amounts for a participant who has a loan balance when the plan terminates or when the participant severs employment:
    1. Old Rule: The employee has 60 days to contribute the loan balance to an IRA or the loan is treated as a taxable distribution.
    2. New Rule: The employee has until the due date for filing their Federal Income Tax return for that year to contribute the loan balance to an IRA or the loan is treated as a taxable distribution.

 

If you have any questions on this topic, please contact Anne Christian, CPA at achristian@bwtpcpa.com.

New Rule for IRA Rollovers

Recently, the IRS announced a new rule that limits the number of individual retirement account rollovers, or, IRA rollovers, that an individual may complete during any 12-month period.

One way an individual may make a tax-free transfer between two IRAs is by taking a distribution from one IRA and then depositing the distributed amount into a second IRA within 60 days (a “rollover”). The tax law provides, however, that individuals are allowed to complete only one rollover per year.

Until recently, the IRS had interpreted this one-year rule as applying to each IRA individually, rather than to all of an individual’s IRAs collectively. In other words, an individual could complete any number of IRA rollovers in a 12-month period, as long as no single IRA was used more than once.

However, the U.S. Tax Court recently concluded that the IRS’s interpretation was incorrect and that the limitation applies on an aggregate basis. Shortly thereafter, the IRS announced that it would follow the Tax Court’s decision. However, the IRS also announced that it will not apply the new rule to distributions made before January 1, 2015.

Taxpayers will continue to have the ability to have IRA funds transferred directly from one IRA trustee to another IRA trustee tax free without restriction. Trustee-to-trustee transfers are not subject to the one-IRA-rollover-per-year rule.