Six 2015 Retirement Tax Rules You Must Know
- Once-per-year IRA rollover rules. The tax court ruled in the Bobrow case (January 28, 2014) that the once-per-year IRA rollover limit applies to ALL of a person’s IRAs and not to each IRA separately, as was the case in the past. IRS Announcement 2014-32 (effective January 1, 2015) stated that Traditional and Roth IRAs are combined for purposes of the once-per-year rule. Checks made directly to receiving IRAs qualify as trustee-to-trustee transfers.
- The fallout: Individuals could lose their IRAs. IRS has no authority to give relief.
- The action plan: IRA-to-IRA direct transfers are not affected and are strongly recommended. Be careful with every IRA rollover.
- The fallout: Individuals cannot simply take out only after-tax funds and pay no tax, while leaving pre-tax funds in their plan.
- The action plan: These special rules will allow individuals to separate pre-tax and after-tax amounts of pro-rata distributions after they leave the plan. Reminder, these rules do NOT apply to IRA distributions, which still follow the pro-rata rule.
- The fallout: The converted funds are now available tax and penalty free.
- The action plan: All individuals who went through with a 2010 Roth conversion should know that those converted funds are now available penalty free regardless of age. Note: The earnings cannot be withdrawn penalty free unless you’re 59½ or older.
- The fallout: Valuations will be required for taxation of IRA distributions and conversions to a Roth IRA.
- The action plan: Make sure your are reporting these assets on Forms 1099-R and 5498 in 2015.
- The fallout: QLACs must be fixed annuities. Variable annuities, equity indexed annuities and similar products will not qualify.
- The action plan: You should see if these are a fit for your sitaution. Note: QLACs may not offer any commutation benefit, cash surrender value or similar feature.
- The fallout: Inherited IRAs are not protected in bankruptcy under federal law.
- The action plan: Revisit naming a trust as the IRA beneficiary to enhance creditor protection. Remember, the top trust tax rates ($12,300) kick in much lower than if you file married jointly ($464,850). The solutions to this problem are conduit trusts, Roth conversions and life insurance.
© 2015 Ed Slott and Company, LLC