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New 2018 IRA and Pension Tax Law Changes

Posted by James M. Carlson
Feb 01 2018

On Friday, February 9, President Trump signed into law the Bipartisan Budget Act of 2018. Although the primary purpose of the budget law was to establish the federal budget, there were many tax law changes including some IRA and pension tax law changes.

First, the special disaster related tax rules will apply to the victims of the California wildfires. Distributions entitled to the special tax relief are those made on or after October 8, 2017, through December 31, 2018. That is, the 10% penalty tax does not apply and the two special 3 year rules apply. A distribution may be taxed over the three tax years and a person has three years on which to repay/rollover a distribution.

The second change is with respect to the rollover rules. At times, in order to collect tax funds owed by a taxpayer the IRS will levy an individual's pension funds and/or the individual's IRA funds, including inherited funds. That is, a distribution occurs because the IRS requires the pension trustee or the IRA custodian to issue a check to the U.S. Treasury. Sometimes the IRS must return such funds. The new law treats the IRS' repayment of these wrongful levies as being eligible to be rolled over either into the pension plan or an IRA. The IRS has the duty to inform the individual that he or she is eligible to make this special rollover. This change applies to IRS payments made after December 31, 2017.

An IRA owner who is considered to have received an IRA distribution because the IRS wrongfully levied his or her IRA is authorized to return the withdrawn amount to their IRA (or inherited IRA). This special rollover must be made no later than the due date of the individual's tax return for the year the money is returned by the IRS, but not including an extension.

It appears a pension plan is not required to be written to accept such a rollover because such funds may be rolled over into an IRA. The amount eligible to be rolled over is the amount paid to the IRS which is repaid plus any interest paid by the IRS.

This special rollover contribution is not to be counted for purposes of the once per 12 month rollover rule.

This is the first law change expressly authorizing a rollover of inherited IRA funds. Although this law change certainly benefits the affected taxpayers it does make the rollover rules more complex. There are other legislative proposals in the U.S. Congress which would allow an IRA beneficiary to roll over inherited funds distributed on an account of the IRA custodian's mistake. Time will tell if there will be an additional law change with respect to inherited IRA and rollover rights.

We will be revising our IRA forms, as applicable, to discuss these new laws.

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