A Person’s 2015 Tax Filing Deadline Is Either April 18, 2016 or April 19, 2016

Posted by James M. Carlson
Jun 12 2015

April 15, 2016 is a Friday. For the reasons discussed below, April 15th is NOT the filing deadline or the last day to make IRA contributions for tax year 2015.

Residents of Massachusetts and Maine have until April 19th, 2016 (a Tuesday) to file their 2015 federal income tax returns and make their 2015 IRA contributions. Residents of the other 48 dates have until Monday, April 18, 2016.

The IRS recently issued Rev. Rul 2015- 13 to discuss for 2015 tax purposes the interplay between two different holidays, Emancipation Day and Patriot’s Day and the rule that a tax return is considered timely if it is filed on the next succeeding day that is not a Saturday, Sunday or legal holiday.

Emancipation Day is a legal holiday recognized in the District of Columbia. The IRS has ruled that the observance of this legal holiday has implications nationwide. Emancipation Day is April 16th of each year. However, if the 16th falls on saturday, the holiday is observed on the preceding Friday (i.e. the 15th) and if the 16th falls on Sunday, it is observed on the following Monday (i.e. the 17th). In both cases the tax filing deadline of April 15th will be revised since the tax filing deadline cannot be a Saturday, Sunday or legal holiday. It wil be the next day following a Saturday, Sunday, or legal holiday which itself is not a Saturday, Sunday or legal holiday.

Patriot’s Day is a legal holiday in the states of Maine, and Massachusetts. It is observed on the third Monday in April. April 18, 2016 is the third Monday in April.

Because some taxpayers could elect to file their federal income tax returns by hand in Massachusetts and Maine at their local IRS office on Monday April 18, 2016, and their deadline would be April 19th since April 18th is a state holiday, the IRS has ruled that all residents of Massachusetts and Maine will have until April 19, 2016 to file their 2015 tax return and make IRA contributions for 2015.

The deadline for the residents of the other 48 states is Monday, April 18, 2016.

However, the deadline for a taxpayer to make his or her estimated tax payments for the fourth quarter 2015 and the first quarter for 2016 is April 18, 2016 for everyone, including the residents of Massachusetts and Maine.

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Lack of IRS Transparency Regarding the Requirement, if any, to Furnish RMD Amount and Date to the IRS on E-version of the 2014 Form 5498

Posted by James M. Carlson
May 29 2015
Some IRA custodians and core processors have asked the question, “is an IRA trustee (custodian) required to complete boxes 12a and 12b of the 2014 Form 5498 to report the RMD amount and RMD date?” If not required, may an IRA trustee voluntarily furnish this information? The simple answer for the first question is, an IRA trustee is not required to furnish to the IRS a e-version of the 2014 Form 5498 with the RMD date (box 12a) and the RMD amount (box 12b) being completed. An IRA trustee may furnish this information to the IRS on a voluntary basis if it suits its business purposes and goals. CWF suggests an IRA trustee who decides to voluntarily furnish this RMD information to the IRS should have on file the customers’ consent to do so. Some customers may dispute the furnishing of this information if the IRS does not have the authority to mandate that it be furnished. Why isn’t it mandatory for an IRA trustee to furnish the RMD amount and date information to the IRS? A short tax history review is helpful. There was a major tax bill in 2001. In 2002 the IRS totally rewrote the governing regulation for required distributions. Prior to the 2003 version of the Form 5498, there was no box 11 to be checked to inform the IRS that an IRA owner was subject to the RMD rules. Box 11 was added to the 2003 version because in 2002 the IRS and Congress reached a compromise. The IRS has maintained for a long time that existing law allows it to require an IRA custodian to report to the IRS information regarding required distributions. Many in Congress disagreed. The compromise was, an IRA trustee would be required to inform the IRS that a person who is age 701/2 or older (but not for an inheriting beneficiary) is subject to the RMD rules for a given year, but it was not required to furnish the RMD amount or the RMD deadline date. This compromise position is set forth in IRS Notice 2002-27 and the current 2014 instructions for Form

Some IRA custodians and core processors have asked the question, “is an IRA trustee (custodian) required to complete boxes 12a and 12b of the 2014 Form 5498 to report the RMD amount and RMD date?” If not required, may an IRA trustee voluntarily furnish this information?

The simple answer for the first question is, an IRA trustee is not required to furnish to the IRS a e-version of the 2014 Form 5498 with the RMD date (box 12a) and the RMD amount (box 12b) being completed. An IRA trustee may furnish this information to the IRS on a voluntary basis if it suits its business purposes and goals. CWF suggests an IRA trustee who decides to voluntarily furnish this RMD information to the IRS should have on file the customers’ consent to do so. Some customers may dispute the furnishing of this information if the IRS does not have the authority to mandate that it be furnished.

Why isn’t it mandatory for an IRA trustee to furnish the RMD amount and date information to the IRS?

A short tax history review is helpful. There was a major tax bill in 2001. In 2002 the IRS totally rewrote the governing regulation for required distributions. Prior to the 2003 version of the Form 5498, there was no box 11 to be checked to inform the IRS that an IRA owner was subject to the RMD rules. Box 11 was added to the 2003 version because in 2002 the IRS and Congress reached a compromise. The IRS has maintained for a long time that existing law allows it to require an IRA custodian to report to the IRS information regarding required distributions. Many in Congress disagreed.

The compromise was, an IRA trustee would be required to inform the IRS that a person who is age 70½ or older (but not for an inheriting beneficiary) is subject to the RMD rules for a given year, but it was not required to furnish the RMD amount or the RMD deadline date.

This compromise position is set forth in IRS Notice 2002-27 and the current 2014 instructions for Form 5498 and Form 1099- R. On page 19 of the 2014 Instructions for Form 5498, it is written,

Reporting to the IRS. If an RMD is required, check box 11. For example, box 11 is checked on the Form 5498 for a 2015 RMD. You are not required to report to the IRS the amount or the date by which the distribution must be made. However, see the Caution following the Box 11 instructions, later, for reporting RMDs to participants. For more details, see Notice 2002-27 on page 814 of Internal Revenue Bulletin 2002-18...

In section II of IRS Notice 2002-27, a similar statement is set forth as the required reporting of required distribution information,

Beginning with required minimum distributions for calendar year 2004, if a minimum distribution is required with respect to an IRA for a calendar year, the trustee of the IRA must indicate that a minimum distribution is required with respect to the IRA for the calendar year (but need not indicate the amount on Form 5498, Individual Retirement Arrangement Information, for the immediately preceding year (i.e. on a 2003 Form 5498 for a a 2004 required minimum distribution) in accordance with the instructions for Form 5498.

The 2003-2008 versions of Form 5498 had Box 11, the RMD box. This box must be checked for any person age 70½ or older. The IRS made a major revision to the 2009 Form 5498. There were nine new boxes added:

12a-b for RMD date and amount, 13a-c for postponed contributions, 14a-b for repayments and 15a-b for other contributions.

It is clear that the IRS wants to be provided with the RMD information for various tax administration reasons. The IRS position is, the IRS need this information in order to effectively administer the tax law which imposes a 50% annual excise tax if an IRA accountholder or inheriting beneficiary fails to withdraw all of his or her RMD.

The IRS is comprised of intelligent individuals and in 2009 the IRS devised a reporting process where an IRA trustee might furnish the RMD information on a “voluntary” basis. In 2008/2009 the IRS issued guidance that an IRA trustee could furnish Form 5498 in January of the following year and it could serve triple duty; it would satisfy the requirement to furnish the Form 5498 by May 31 of the following year, it would satisfy the FMV statement requirement and it would satisfy the RMD notice requirement by completing boxes 12a and 12b.

An IRA trustee must furnish a Form 5498 to the IRS and to an IRA accountholder. For the reasons discussed, it is not required that these two 5498 forms be identical. Most people might believe the forms must or should be identical. The RMD information may be furnished to the IRA accountholder, but it need not be furnished to the IRS. The IRS probably was right in thinking there will be many cases where the software will not be written to have this distinction. It is certainly simpler to provide the identical information to both the individual and the IRS.

Unless the IRS is told to do so by Congress, we at CWF don’t believe the IRS will add an explanation (i.e a sentence) to Publication 1220 expressly stating as is done in the instructions for Form 5498 that “You are not required to report to the IRS the amount or the date by which the distribution must be made.”

On page 4 we set forth various excerpts from pages 103 and 104 dealing with submitting data for the Form 5498. Look at field position 566-573, there is no indication that this information is “required.” When required, “Required” is the first word in the General Field Description. In the practical world, it is the core processor or the IRA service provider who will answer these questions. An IRA custodian may be impacted because the core processor decides the way the IRS software is written and consequently may decide to furnish the RMD date and amount information to the IRS even though the IRS does not have the authority to require the IRA trustee to furnish it.

A number of core processors have come to incorrectly believe it is mandatory to furnish the RMD amount and date to the IRS on the e-version of Form 5498. Every IRA trustee wants to understand whether its core processor is sending to the IRS the RMD date and amount information on the eversion of Form 5498. If so, you may wish to find out if the core processor has the capability of not sending the RMD data if your institution would so request.

In closing, the tax laws governing the reporting of IRA transactions are complicated and should be made simpler. We hope the IRS will make some changes to simplify things. The IRS should be more transparent and make it clear that an IRA trustee does not have the duty to report the RMD amount and the RMD date on the Form 5498, but it may be furnished to the IRS on a voluntary basis.

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DOL Re-Proposes Rule on Definition of a Fiduciary for IRAs and Pension Plans

Posted by James M. Carlson
Apr 30 2015

On April 20, 2015 the DOL finally issued its long awaited revised definition of who is a fiduciary. The DOL in 1975 issued a regulation defining a fiduciary. The current DOL does not like this definition and wants to change it.

The DOL’s proposal is very complicated and time will tell to what extent this proposal will be implemented. There is going to be substantial negative response to this proposal. One would hope Congress will take an active role in this matter because the DOL is essentially making new law without instruction from Congress to do so.

In October of 2010 the DOL proposed a new definition of who is a fiduciary for pension and IRA purposes. In September of 2011 after receiving substantial negative comments from powerful politicians from both parties the DOL stated it would be withdrawing the 2010 proposal.

The 2015 proposal would treat persons who provide investment advice or various recommendations to an IRA, the IRA owner, pension plan, plan fiduciary, the plan participant or a beneficiary as a fiduciary. The proposal contains certain exceptions when a person would not be considered to be a fiduciary,. but these exception rules are murky at best.

One of the primary goals of the DOL is to make any one serving an IRA or pension plan a fiduciary and then require such person to act in the best interest of the IRA owner or the pension plan participants. In theory this may seem very desirable, but it is unworkable in the real world. The DOL is well aware of the large amount of wealth being directly rolled over into IRAs from 401(k) plans and other retirement plans ($2 trillion over the next 5 years). The DOL believes that individuals who are non-fiduciaries may give imprudent and disloyal advice and then direct IRA owners to invest their IRA funds in investments based on their own interests rather than the best interest of the IRA owners (i.e. their clients). The DOL also believes most individuals are incapable of managing their own IRAs. The powers that be within the DOL do not really like that fact that most 401(k) plans are written to allow for participants to invest their own account balances. The DOL believes that professional money managers would do a better job.

In October of 2010, the EBSA had published a proposed rule revising a 1975 regulation defining when a person is a “fiduciary” with respect to an IRA or pension plan by reason of giving investment advice for a fee. The 1975 regulation provided for a five-part test to determine if a person was a fiduciary. Under this rule, a person is a fiduciary only if he or she:

  1. makes recommendations on investing in, purchasing or selling securities or other property, or gives advice as to their value
  2. on a regular basis;
  3. pursuant to a mutual understanding that the advice;
  4. will serve as a primary basis for investment decisions; and
  5. will be individualized to the particular needs of the IRA or plan.

A person who did not meet all five conditions was and is not a fiduciary. The current EBSA believes there are situations where a person should be a fiduciary even though they are not one under existing law. One example, an investment representative selling an investment product to an IRA owner making a rollover contribution is not a fiduciary since he or she most likely is not performing services on a “regular basis”. So, the new rule has been proposed with the goal to make many more individuals fiduciaries.

The DOL’s proposal, if adopted, will radically change the definition of whom would be a fiduciary for IRA and pension purposes. We will will keep you informed. We expect Congress will furnish a response to the DOL’s proposal within the next 2-6 weeks. We would suggest a bank serving as an IRA custodian/ trustee will wish to inform its congressional representatives that this proposed regulation is too complicated and the DOL should be informed it should not be adopted and implemented.

Categories: Pension Alerts

SEPs - The Last Minute Retirement Plan and Tax Deduction

Posted by James M. Carlson
Mar 25 2015
Definitions

SEP — SEP is the acronym for Simplified Employee Pension plan. In order to have a SEP, two requirements must be met. First, an employer must sign a SEP plan document which may be: (1) the IRS model Form 5305-SEP; (2) a SEP prototype; or (3) a SEP plan as written specifically for that employer by an attorney. The employer maybe a gigantic corporation or a self employed person. Second, all eligible employees must establish (or have established for them) a SEP-IRA.

SEP-IRA —A SEP-IRA is a standard, traditional IRA established with a financial institution to which an employer has made a SEP-IRA contribution. The IRA custodian is required to report SEP-IRA contributions in box 8 on Form 5498. In all other respects, the standard, traditional IRA rules will apply to administering SEP-IRAs. Contributions to SEP-IRAs are always owned by the employee, once the funds have been contributed to the employee’s SEP-IRA.

Discussion

SEP plans may be established and funded by the normal tax deadline, plus extensions. A person may come into your institution in July of 2015, and make a SEP contribution of $52,000, for tax year 2014. If an individual has the proper extension(s) a SEP contribution may be made as late as October 15 of 2015, for tax year 2014.

The Contribution Rules Applying to SEPs are Very Favorable

1. The maximum contribution for 2014 is the lesser of $52,000, or 25% of a person’s compensation. The limit for 2015 is $53,000.

2. The age 70½ eligibility rule that applies to traditional IRAs does not apply to SEP-IRAs. A farmer, age 74 and still farming and has net income, may still make contributions to their SEP-IRA. A corporation (and any other employer) is required to make a contribution for any employee age 70½ or older, as long as the employee has met the eligibility requirements. The age discrimination laws prohibit an employer from not making such contributions. An employee may not waive the contribution.

3. All contributions made to a SEP-IRA by an employer are employer contributions, and are reported in box8 of Form 5498. However, an individual is permitted to make his or her annual traditional IRA contribution to the same IRA to which a SEP contribution is made. Annual contributions are reported in box 1 on Form 5498. Such annual contributions mayor may not be deductible.

4. An employer is not required to make SEP IRA contributions each year. Contributions are also discretionary as to amount.

5. The contributions that an employer makes for its employees are deductible by the business entity on its tax return. A corporation will claim the deduction on Form 1120. A partnership will claim the deduction on Form 1065, and partners will be informed of their respective shares on Schedule K-1. A sole proprietor may deduct SEP contributions on his or her Schedule C for Form 1040.

6. Contributions by the employer to a person’s SEP-IRA are not taxed for income tax purposes, withholding purposes, social security income tax purposes, Medicare tax purposes, or federal unemployment income tax purposes.

7. There are special contribution rules for self-employed individuals. A self-employed individual does “deduct” his or her contribution amount to a SEP-IRA on Form 1040. That is, the amount contributed to the SEP-IRA is not excluded from income, as occurs for corporate employers. Since the maximum contribution is the lesser of 25% of compensation, or $51,000 for 2013, one must calculate the “compensation” for a self-employed individual. Compensation for a self-employed person is his or her net earnings from self-employment, as decreased by (1) the amount contributed to their SEP-IRA, and (2) 50% of his or her self-employment tax (the IRS has a special chart and formula to be used for this calculation).

8. An employer is required to provide each employee with an annual statement indicating the amount contributed to the employee’s SEP-IRA for the year. A self-employed person is not required to prepare a statement for himself.

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Establishing a SEP for 2014

Posted by James M. Carlson
Mar 25 2015

As with any tax procedure, there are certain actions that must be taken in order for any business, including a one person business, to establish a Simplified Employee Pension Plan (SEP). If not properly established, the expected tax benefits will not be realized.

What must be done by the business? First, there must be written plan agreement. Most businesses will choose to complete and execute the IRA model Form 5305-SEP, Simplified Employee Pension–Individual Retirement Accounts contribution Agreement.

A business may set up its SEP for a year (e.g. 2014) as late as the due date including extensions for the tax year. So, a business may establish a SEP for 2014 on October 15, 2015, if it has an extension for its 2014 tax return.

The maximum contribution for 2014 is the lesser of: 25% of a person’s qualifying compensation or $52,000.

The business must provide certain information to each employee, if any. If no employees, then this information is not furnished. If there are employees, in general, they will be furnished a copy of the Form 5305-SEP and its instructions.

What must be done by each individual?

Each eligible employee, including the individual who is the sole proprietor or sole shareholder, must establish a SEP-IRA. A SEP-IRA is a standard traditional IRA to which a SEP contribution has been or will be made. The tax laws do not require a person who has an existing traditional IRA to set up a new SEP-IRA. Some financial institutions choose for administrative reasons to require a separate IRA, but the tax laws do not require it. If any employee would fail to have a SEP-IRA so the business did not make a SEP contribution for such employee, there would be no SEP and the expected tax benefits would not apply for the sponsoring business and other employees.

In summary, establishing a SEP is easy as long as the two steps above are completed for a one person business and the three steps are completed for a business with employees.

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Seeking IRA Contributions by April 15, 2015

Posted by James M. Carlson
Mar 25 2015

U.S. taxpayers are not taking advantage of IRAs as one would expect and hope. Many younger individuals have not grown up with IRAs being common. Many individuals do not understand that a person is able to contribute to both a traditional IRA and the 401(k) plan at work.

The IRS has recently released their tax data for tax year 2012. April 15th and the end of the 2014 tax year is close at hand. This is the deadline for contributions to a traditional IRA and a Roth IRA for 2014.The deadline for SEP-IRAs and SIMPLE-IRAs may be extended if a tax extension is in effect.

These 2012 IRA statistics show there is a substantial balance in IRAs (5.4 trillion dollars), with 86% of it (4.6 trillion) with-in traditional IRAs. This is primarily due to rollovers from 401(k) and other pension plans. These statistics also shows there should be larger "annual" IRA contributions. There were 198.6 million taxpayers for tax year 2012. 65.8 million individuals were covered by a pension plan and so they were active participants for IRA deduction purposes. There were 146.2 million taxpayers who were eligible to make either a traditional and/or Roth IRA contribution. Some individuals were only eligible to make non-deductible contributors. 80.4 million taxpayers were eligible to make deductible contributions as they had compensation and they were not covered by an employer sponsored pension plan. 11.3 million taxpayers made contributions to the four types of IRA assets set forth in Chart #1. $50.7 billion was contributed with 17.6 billion to Roth IRAs, 14.1 billion to traditional IRAs, 11.4 billion to SEP IRAs and 7.5 billion to SIMPLE IRAs. 135 million taxpayers were eligible to make an IRA contribution, but they chose not to do so. This number is much larger than it should be. The tax benefits of IRAs are substantial, but not so substantial that a large percentage of individuals make an IRA contribution.

As you would expect, the percentage of those individuals with higher incomes who make an IRA contribution is higher than the percentage applying to those with lesser incomes. But it is not as high as one would expect. For individuals who have adjusted gross incomes of $1 million or more, 413,157 out of a total of 718,895 are eligible to make a IRA contribution. Only 99,076 or 24% do so. In this day and age of financial planners one does wonder why the other 76% do not see the benefit to make an IRA contribution. For individuals who have adjusted gross incomes of $100,000 - $200,000, 21.7 million out of a total of 28.5 million are eligible to make a IRA contribution. Only 3.3 million or 15% do so. For individuals who have adjusted gross incomes of $50,000 - $75,000, 21.4 million out of a total of 28.7million are eligible to make a IRA contribution. Only 1.9million or 9% do so. It is 7.6% for those individuals with incomes between $40,000 - $50,000. It is 5.7% for those individuals with incomes between $30,000-$40,000. For individuals who have adjusted gross incomes of less than $30,000, 56.0 million out of a total of 78.0 million are eligible to make a IRA contribution. Only 1.3 million or 0.2% do so. Of the 11.3 million taxpayers who had IRA contributions, only 3.5 million were made by individuals who claimed a tax deduction on their personal tax return. Remember that the 5.5 million Roth IRA contributions are unable to claim a tax deduction for their contributions. A total of 1.6 million taxpayers had a SIMPLE IRA contribution. Only 97,000 taxpayers claimed a deduction on their tax returns. This means that 1.5 million contributions are made by a business on behalf of its employees. A total of .98 million taxpayers had a SEP-IRA contribution. 383.6 thousand taxpayers did claim a deduction on their tax return. This indicates that many one-person businesses have a SEP. However, small employers also will sponsor a SEP for their employees as the statistics show contributions being made for 600,000 employees. All IRA custodians want to service those individuals rolling over funds from 401(k) plans and other IRAs. Rollover contributions totaled 300 billion in 2012. The average rollover was $74,800. The average rollover into a Roth IRA was $18,000. Only 1.4% of rollovers went into a Roth IRA. This will certainly increase dramatically in future years as the law now permits individuals to rollover 401(k) funds directly into a Roth IRA. See the newsletter for an article discussing new IRS rules making it easier to rolling over basis into a Roth IRA. And individuals are increasing their Roth IRA conversions as 415,243 did a conversion which averaged $38,344. Under existing tax laws a person wants to maximize the amount he or she has in a Roth IRA. More people should be making IRA contributions than do. An excellent planning tool is not be used to the degree it should be. It is never too late to start making IRA contributions. Individuals should be making 401(k) contributions and IRA contributions and not just 401(k) contributions. During the next 45-75 days a financial institution should be seeking IRA/SEP/SIMPLE-IRA contributions and Roth IRA contributions.

The maximum IRA contribution limits for 2014 and 2015 is $5,500 if under age 50 and $6,500 if age 50 or older. The maximum SEP contribution for 2014 is $52,000 and $53,000 for 2015.

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Tax Law Proposals Will Cut by 50% the Pre-Tax Elective Deferral Limit

Posted by James M. Carlson
Dec 23 2014

Many people in Congress believe the federal government needs additional tax revenues and Congress is considering changes to accomplish this goal. This article discusses the proposed law changes for 401(k), 403(b) and governmental section 457(b) plans. An adjacent article discusses the proposed IRA changes. Except as stated otherwise, the new laws, if enacted, would be effective for the 2015 tax year. Time will tell if these or similar changes will be enacted.

Proposed change #1. Reduce the 2014 annual maximum 401(k) limit from $17,500/$23,000 to $8,750/$11,500 for Pre-Tax Elective Deferrals.

The $17,500 limit applies to those individuals younger than age 50 and the $23,000 limit applies to those individuals age 50 or older. Under existing law a participant may make both pre-tax elective deferrals and post-tax elective deferrals totaling $17,500/$23,000. Post-tax elective deferrals are called designated Roth contributions.

The right to make pre-tax deferrals would be reduced 50%. As under existing law, an employer would not be required to write its 401(k) plan to give the participants the right to make designated Roth contributions. But there would now be large tax incentive to do so. The only way for a person to make the maximum elective deferrals of $17,500 and $23,000 is for an employer to have a 401(k) plan authorizing designated Roth elective deferrals. In fact, an employer could restrict its 401(k) plan so that the only type of elective deferral which could be made by plan participants would be Designated Roth contributions.

The federal government at least on a short term basis will immediately realize more tax revenues from this change. Remember that a pre-tax elective deferral reduces a person’s income subject to federal taxation. For example, a 51 year old person earning $100,000 and deferring $23,000 would see his/her taxable income increase to $88,500 from $77,000 and thus he/she will pay income taxes on the additional $13,500. An individual would be able to make Designated Roth elective deferrals assuming the employer’s 401(k) plan authorizes such contributions.

This change would be effective for 2015 and such limits would not be changed until 2023. That is, the cost-of living adjustments would be suspended.

Proposed change #2. Under existing law the amount of compensation used to determine a person’s maximum pension contribution is $210,000 with a maximum contribution amount of $52,000. This limit is to be adjusted by a cost-of-living adjustment, but only if the adjustment is $1,000 or any multiple of $1,000. For example, the maximum contribution for 2015 will be $53,000 if this proposed change is not adopted. This annual adjustment would be suspended until 2023. Again, this change will raise revenue.

Proposed change #3. Beneficiaries of pension plans would become subject to the new RMDs rules very similar to those discussed within the IRA article. Again, this change would raise revenue.

Proposed change #4. In a limited situation there is a loophole in the RMD rules applying to a person who becomes a 5% owner after the year he or she attained age 70½, but he or she is still working. Must this person take an RMD now that he/she has become a 5% owner. The law does not clearly require such a distribution. Under existing law, a plan participant who is not a 5% may have a required beginning date of the April 1 of the year following the year he/she separates from service if such year is later than the year he/she attains age 70½. That is, he/she is not subject to the general rule that a person’s required beginning date is April 1 of the year following the year he/she attains age 70½. However, a participant who is a 5% in the year he/she attains age 70½, then such person has a required beginning date of April 1 following the year he/she attained age 70½.

Under the proposal, this person’s required beginning date is defined the April 1 of the year following the year he or she became a 5% owner regardless that the person has not yet retired.

Proposed change #5 will reduce the age for allowable in-service distributions to age 59½ for all plans – profit sharing, pension, 403(b) and governmental 457(b) plans. An employer may write its plan to provide for in-service distributions, but it is not required to do so. Under current law the earliest a pension plan may be written to allow an in-service distribution is age 62.

Proposed change #6 will repeal the requirement that a participant is prohibited from making elective deferrals for 6 months once he/she receives a hardship distribution of his/her elective deferrals. A participant receiving a hardship distribution would not be prevented from making subsequent elective deferrals for any period of time.

Proposed change #7 would revise the rollover rules applying to a distribution which has been reduced by a loan offset. It would not change existing law that a deemed distribution arising from a loan default is ineligible to be rolled over even though the participant must include such amount is his/her income and pay the 10% additional tax, if applicable. In the case of a loan offset, the participant is eligible to roll over the amount of the loan offset, but he/she must comply with the 60-day rule. For example, Jane Marple has a 401(k) account balance of $49,000 of which $8,000 is a loan made to herself. She instructs to directly rollover the non-loan amount of $41,000 to a traditional IRA. She is eligible to rollover such $8,000 but she must come up with the $8,000 and do so within the 60-day limit. If she does not do so, she will be required to include the $8,000 in her income, pay tax on it plus the 10% tax if applicable.

A new law would apply a new deadline to a participant in Jane Marple’s situation to roll over the $8,000 or some portion thereof. The new law would be very generous, she would have until her tax filing deadline (including extensions) for filing the federal income tax return for the tax year during which the plan loan offset occurs. For example, if Jane Marple directly rollover her $41,000 on January 30, 2015, she would have until April 15, 2016 to make a rollover contribution of $8,000 and such deadline could be extended to October 31, 2016 if she had a tax extension.

Proposed change #8 would revise the rules applying to contributions to 401(k), 403(b) and governmental 457(b) plans to coordinate such rules. Presently contributions to a governmental 457(b) plan are not coordinated. In addition, there would be repeal of the rules allowing special catch-up and additional contributions to 403(b) and governmental 457(b) plans at certain times. And there would be repeal of the special rules allowing employer contributions to section 403(b) plans for up to 5 years after termination of employment and the special rules for church employees and missionaries.

Proposed change #9. A distribution from a governmental section 457(b) to an individual not yet age 59½ would become subject to the 10% additional tax. Present law does not impose this tax.

The primary purpose of most of the proposed law changes is to raise additional revenue. Lowering the maximum limit of pre-tax elective deferrals will accomplish this goal as will imposing the 5-year on most inheriting beneficiaries. The 5-year rule seems very harsh when it is more likely that relatively large balances will be within 401(k), 403(b) or section 457(b) plan. Time will tell if these proposed changes will be enacted into law.

Categories:

Will 2014 be the last year for Traditional IRA Contributions

Posted by James M. Carlson
Dec 23 2014

We hope not, but time will tell. A recently introduced tax bill, the Tax Reform Act of 2014 would make some drastic changes to IRA laws and pension laws.

One Congress is soon ending and another Congress will soon be starting. The current chairmen of the Tax and Ways Committee is Mr. David Camp. He has proposed many major tax, law changes in a proposed tax bill, the Tax Reform Act of 2014.

This article discusses these proposed IRA changes. The adjacent article will discusses the pension changes.

Not too many politicians are willing to expressly promote that major changes be made to social security, but it will be interesting to see whether they are willing to change the IRA and pension laws which have existed for 40 years. Individuals have relied on the tax laws in deciding to make contributions. Many of the tax laws require a mandatory increase in various IRA/pension limits to reflect the impact of inflation. These mandatory increases result in less revenue being available to the federal government.

As with any law, Congress and the President may always change a law, whether it be social security or IRAs or pensions. Congressional representatives are always looking for new or additional sources of revenue. This is as true today as it was in 1986 when the decision was made to take away the right of many taxpayers to make tax deductible contributions. Prior to 1987, individuals contributed 35 billion dollars of deductible contributions, but that amount has now deceased to around 12 billion per year. Many individual are contributing to their employer’s 401(k) plans and not making contributions to their traditional IRAs. Existing law allows a person to do both.

What are the IRA changes within the proposed Tax Reform Bill of 2014? Except as stated otherwise, the new laws would be effective for the 2015 tax year.

Proposed change #1. All taxpayers with compensation will be eligible to make an annual Roth IRA contribution. Under existing law, individuals who incomes are “too high” are ineligible to make an annual Roth IRA contribution.

Proposed change #2. The right to make annual traditional IRA contributions is repealed. This includes both deductible and nondeductible contributions.

Proposed change #3. The 2014 and 2015 IRA contribution limit is $5,500 if under age 50 and $6,500 if age 50 and older. This limit is to be adjusted by a cost-of-living adjustment of $500 when the accumulated change is $500. This adjustment would be suspended until 2023.

Proposed change #4. The special rules applying to the withdrawal of traditional IRA and Roth IRA funds if used for a first-time home purchase would be repealed. Withdrawing funds from a Roth IRA for a first-time home purchase would no longer be a qualified (tax-free) distribution. And taxable funds withdrawn from either a traditional, SEP, SIMPLE or Roth IRA by a person under age 59½ would be subject to the 10% additional tax.

Proposed change #5. The right for an employer to establish a new SEP-IRA plan is repealed as of December 31, 2014. However, an employer with a SEP as of December 31, 2014 is grandfathered and is allowed to continue its SEP plan as long as such plan meets the existing requirements for such plan year and every year thereafter.

Proposed change #6. The right for an employer to establish a new SIMPLE-IRA plan is repealed as of December 31, 2014. However, an employer with a SIMPLE- IRA plan as of December 31, 2014 is grandfathered and is allowed to continue its SIMPLE-IRA plan as long as such plan meets the existing requirements for such plan year and every year thereafter.

Proposed change #7. Under existing law the amount of compensation used to determine a person’s maximum SEP-IRA contribution is $210,000 with a maximum contribution amount of $52,000. This limit is to be adjusted by a cost-of-living adjustment, but only if the adjustment is $1,000 or any multiple of $1,000. For example, the maximum contribution for 2015 will be $53,000 if this proposed change is not adopted. This annual adjustment would be suspended until 2023.

Proposed change #8. Under existing law the maximum deferral amount for 2014 is $12,000 if a person is under age 50 and $14,500 if the person is age 50 or older. These limits are to be adjusted by a cost-of-living adjustment but only if the adjustment is $500 or any multiple of $500. For example, the maximum limits will be $12,500 and $15,000 for 2015 if this proposed change is not adopted. This annual adjustment would be suspended until 2023.

Proposed change #9. Current law permits a person to recharacterize an annual contribution and also to recharacterize a Roth IRA conversion contribution. In the case of annual contribution it allows a person who has made a traditional IRA contribution to switch it to be a Roth IRA contribution or vice versa. In the case of a Roth IRA conversion contribution it allows an individual to un-do it for any reason. The proposed law would repeal the law authorizing rechacterizations. Why?

When one recharacterizes a prior Roth IRA conversion, the federal government will not collect the tax revenues which would have been paid if the individual was unable to un-do the conversion. That is, a conversion once made would be irrevocable.

With respect to recharacterizing a current year contribution, the administrative work for IRA custodians and the individual are very labor/paper intensive and complex for all parties involved, including the IRS. In order to simplify IRA administration, the proposal is to revoke such rules. Being able to do a recharacterization can be quite beneficiary for an individual, so CWF would have a less extreme suggestion. Allow the IRA custodian to charge reasonable fees to process a recharacterization.

The recharacterization rules give an individual substantial flexibility in planning and executing various transactions. Some people feel the law is too generous and that individuals should not be granted such planning flexibility.

Proposed change #10. Current law allows a beneficiary to withdraw his/her required distributions over his/her life expectancy. For example, a beneficiary age 39 would be able to take RMDs over a 43 time period. The new law would define the new general RMD rule to be – the beneficiary must use the 5-year to determine his/her RMDs. That is, all funds within the inherited IRA must be distributed by December 31 of the fifth year following the year the IRA owner died. An individual will almost always pay larger tax bills than is the case under existing law. The federal government will be able to collect more taxes much sooner than under existing law.

Mr. Camp, as apparently many other representatives, has concluded that too much tax revenue is being deferred too long by allowing an inheriting IRA beneficiary to be able to stretch distributions over his/her life expectancy. Unless taxpayers inform their representatives that they will not tolerate this change, this type of change is coming. The representatives may be thinking that most beneficiaries are in their 30’s or 40’s. The reality is, most beneficiaries are in their 50’s, 60’s or 70’s and they will have a desire to use such funds for their retirement. More IRA accountholders are living into their 80’s and 90’s. Under current IRS rules, a beneficiary has his/her RMD calculated using the life distribution rule unless he/she is able to and does elect to the 5-year rule. Some beneficiaries called eligible beneficiaries will still be able to use the life distribution rule. For many beneficiaries, the use of the life distribution rule is repealed.

If a person meets any of the following requirements as of the IRA owner’s death, he/she is an eligible beneficiary:

  1. He/she is the surviving spouse;
  2. Disabled
  3. Chronically ill
  4. An individual who is not more than 10 years younger; or
  5. A child of the IRA owner who has not yet attained age 22.

As under existing law a spouse beneficiary who is the sole beneficiary is not required to take a distribution until December 31 of the year the deceased spouse would have attained age 70½. And if he/she dies before such date, the surviving spouse is treated as the IRA for the purpose of determining the required to be made to the beneficiaries of the surviving spouse.

A beneficiary who is the child of the IRA owner will generally not be an eligible beneficiary and will be required to deplete the inherited IRA using the 5-year rule. The exception is when the child beneficiary is not yet age 22. A child is no longer an eligible beneficiary once he/she attains age 22. The 5-year rule will then apply. The 5-year rule will always apply once an eligible beneficiary dies.

The new rules would apply to an IRA owner dying after December 31, 2014.

For those beneficiaries of an IRA owner who died or dies before January 1, 2015, the current RMD rules continue to apply. However, upon the death of such a beneficiary the 5-year rule will apply and the next beneficiary must withdraw his/her share by the end of the fifth year after the death of the beneficiary.

Of course, the insurance companies have been lobbying the law makers so that certain IRA annuities will not be subject to the 5-year rule and will be paid out over longer time periods. That is, once the IRA owner dies the beneficiary will not be required to close the IRA annuity under the 5-year rule.

In the case of an IRA owner who dies after December 31, 2014, the 5-year rule does not apply to any qualified annuity that is a binding annuity contract in effect on the date of enactment and all times thereafter. An annuity must meet three requirements to be a qualified annuity. First, it must be a commercial annuity. Secondly, it must provide annuity payments which are substantially equal periodic payments not less frequently than annually over the joint life expectancy of the IRA owner and the designated beneficiary according to RMD rules for annuities in effect on the date of enactment. Third, annuity payments must have commenced to the IRA owner before January 1, 2015 and the IRA owner must have irrevocably elected before January 1, 2015, the method and the amount of the annuity payments to the IRA owner or any designated beneficiary.

An IRA annuity which is not a qualified annuity solely because annuity payments have not started irrevocably before January 1, 2015, may still be a qualified annuity if the IRA owner had made an irrevocable election before the date of enactment as to the method and amount of the annuity payments to the IRA owner or any designated beneficiary.

IRA annuities which have already commenced distribution to an inheriting beneficiary will not be subject to the 5-year rule and will be able to stay in existence and be paid out according to the terms of the annuity.

The above proposals are just proposals. But when the chairman of the ways and means committee is supporting them they must be taken seriously. Although the federal government needs additional tax revenues, gaining such revenues by changing the rules so radically after 40 years with little or no public discussion or guidance is unwise and unfair. I

One will need to ask the politicians why they are so willing to radically change the rules applying to IRAs and pension plans. Most politicians would not dare to make similar changes to the social security laws. CWF suggests that individuals communicate to Congress and the President that the proposed changes are too radical. CWF’s suggestion: leave existing law alone or if a change is needed substitute a 15 or 20-year rule for the proposed 5-year rule.

Categories:

Additional IRS Guidance on the Once Per year Rollover Rule and the IRS Can't Be Serious About IRA Transfers

Posted by James M. Carlson
Nov 19 2014

The author of this article is an old tennis nut. John McEnroe’s 1981 tennis exclamation of the 1980’s that “you can not be serious” fits many situations.

The IRS has recently issued additional tax guidance on the once per year rollover rule which goes into effect on January 1, 2015. IRS NewsWire 2014-107 and Announcement 2014-32. This is the third or fourth time the IRS has issued guidance since the tax court’s decision (Bobrow) in January of 2014. The court ruled that a person is allowed to make only one distribution/rollover in a one-year period regardless of how many different IRA plan agreements a person has.

The initial IRS guidance maybe was not as comprehensive or clear as it should have been. One would hope the IRS wants to provide comprehensive guidance on tax subjects so that everyone involved can perform their tax duties.

The most recent guidance makes clear that a person who rolls funds from one Roth IRA to another Roth IRA is ineligible to rollover funds from his or her traditional IRA to another traditional IRA during the one-year period commencing on the withdrawal of the Roth IRA funds. And that any subsequent distributions by this person within the one-year time period from any or his or her IRAs will be ineligible to be rolled over tax free.

The IRS has still not yet commented (furnished guidance) whether an IRA trustee must or should inform existing IRA owners of this change in the once per year rollover year. An existing IRA regulation does require an amended disclosure statement be furnished, but the IRS has not explained why this regulation does not apply if they believe that such an amendment is not required.

The IRS portrays itself as being taxpayer friendly. If the IRS was so friendly, the IRS did not need to agree so quickly to follow the tax court decision. One tax court decision need not be the final decision. The IRS could have appealed the tax court’s decision or asked Congress to change the law to expressly authorize the continuance of the old rule allowing rollovers on a per plan agreement basis. One would think this would be a bipartisan topic.

The IRS is in the business of maximizing the tax revenues of the federal government. Limiting the number of rollovers a person is eligible to make will in some cases lead to more individuals having to pay incomes taxes they otherwise would not have had to pay or at least not as soon. Unlike with pension plans, the law and the IRS has not adopted any procedures allowing IRA mistakes to be corrected. The IRS likes IRA mistakes in the sense that additional taxes in many cases will be owed and paid. However, this conflicts with the fact that the more a person pays in taxes on account of his or her IRA mistakes means less funds for retirement. In some cases, the IRS doesn't’t care and the IRS wants to maximize its collection of tax dollars.

The IRS states in its guidance that it encourages IRA trustees to offer to its IRA owners a transfer distribution of funds rather than a distribution followed by a rollover contribution. A transfer is not subject to the once per year rule as there is no actual taxable distribution. Allowing transfers will lessen the impact of the new once per year rollover rule. The IRS understands that IRA trustees are not required by the tax laws to participate in a transfer. The two involved IRA plan agreements must authorize the transfer.

The IRS states, “IRA trustees can accomplish a trustee to trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.”

The IRS does not give a comprehensive discussion (or any examples) on what it means by making “the check payable to the receiving IRA trustee.” Admittedly, the IRS is trying to give a keep it as simple as possible explanation. But sometimes an approach can be too simple and tax problems are sure to arise.

With the many law changes impacting transfers, some transfers are reportable and some are not. Reportable means one of the IRA trustees must report the transfer distribution on a Form 1099-R and the one of the trustees must report the contribution on the Form 5498 either as rollover, conversion, recharacterization or a qualified HSA funding distribution. In this rollover guidance the IRS offers no guidance as to how reportable transfers are to be handled by the two IRA trustees or by the IRA trustee and the HSA trustee.

Furnishing an IRA trustee or an HSA trustee with only a check will not assure the proper tax administration. In order to assure the correct administration of the transferred IRA funds, the receiving IRA trustee will in some cases need to be furnished certain historical information from the transmitting institution. The IRS does not discuss this topic in any detail. It appears the IRS may be allowing the individual to furnish this information and not require that the remitting institution furnish it. This is shortsighted and it is why this situation is a “you can’t be serious” situation. The IRS should furnish additional guidance.

The IRS seems to authorize the check may be made payable to “ABC Bank” and does not require additional information such as “ABC Bank as Roth IRA trustee fbo Jane Doe” or “ABC Bank as the inherited traditional IRA trustee fbo John Smith abo Mary Smith’s IRA” or “ABC Bank as the HSA trustee fbo of Maria Bell.”

Current IRS procedures provide that an IRA trustee is not to report a “non reportable” transfer on either the Form 1099-R or the Form 5498. CWF has received quite a few consulting calls indicating that some brokerage firms (some large ones) prepare the Form 1099-R for all transfers. This makes their life easier, but complicates the life of every departing IRA owner since he/she must explain on his/her tax return why the amount on the Form 1099-R is not taxable. The IRS apparently does not fine an IRA trustee which prepares a Form 1099-R not required to be prepared. The IRS needs to start imposing fines on such IRA trustees.

As a reminder there are certain distributions which are ignored for purposes of applying the once per year rule. Making a Roth IRA conversion contribution is not counted as a distribution/rollover. Making an HSA Funding distribution is not counted as a distribution/rollover. However, moving funds from an IRA to a 401(k) does count as a distribution/rollover.

Set forth are various examples illustrating why furnishing just a check will not allow for the proper tax administration. Hopefully, the IRS will again furnish additional guidance.

  1. Jane Doe instructs First Bank that she wishes to transfer $30,000 of her traditional IRA funds to Second Bank. She does not make clear into what type of account the $30,000 is to be reinvested. The check is made payable to Second Bank. No additional information is provided. Jane could instruct Second Bank that she wants the funds to go into a Roth IRA. She should include the $30,000 in her income. However, if both banks treat this transaction as a non-reportable transfer, the IRS will have no way short of a full audit to determine if Jane reports the transaction properly on her federal income tax return. She might escape including the $30,000 in her income. Presumably, the two IRA trustees could be fined for not preparing the Form 1099-R and the Form 5498 as is required when there is a Roth IRA conversion. Funds moving from a traditional IRA to a Roth IRA via transfer or rollover is a reportable transaction.
  2. John Hall instructs First Bank that he wishes to transfer $7,550 of his traditional IRA funds to Second Bank. He does not make clear into what type of account the $7,550 is to be reinvested. The check is made payable to Second Bank. No additional information is provided. John could instruct Second Bank that he wants the funds to go into his HSA. He would exclude the $7,550 from his income. However, if both banks treat this transaction as a non-reportable transfer, there will be noncompliance with the IRS reporting rules applying to an HSA Funding Distribution/Contribution
  3. Mary Long instructs First Bank that she wishes to transfer $45,000 of her inherited traditional IRA funds to Second Bank. Her mom had designated Mary as the beneficiary of her IRA. Mary does not make clear into what type of account the $45,000 is to be reinvested. The check is made payable to Second Bank. No additional information is provided. Mary could instruct Second Bank that she wants the funds to go into her own personal traditional IRA. The mistake could be intentional or unintentional. This means she no longer would have to comply with the required distributions rules. She would not be required to take an RMD until she would attain age 70½. If both banks treat this transaction as a non-reportable transfer, the IRS will have no way short of a full audit to determine that Jane made a non qualifying transfer.
  4. One last example. Jane withdrew $30,000 from IRA#1 on June 10, 2014 and she rolled it into IRA #4. She will be eligible to take a distribution from IRA #4 and roll it over only if she does so on or after June 10, 2015,and she has taken no other distribution from any of her other IRAs on or after January 1, 2015 which she rolled over. In conclusion, although the IRS states in recent guidance that all that is needed to transfer IRA funds is to issue a check to the other IRA trustee, CWF suggests that IRA transfer forms, IRA conversion forms and the form for an individual to certify the making a qualified HSA funding distribution still be used. The goal is to limit the mistakes made by individuals and IRA trustees.

Categories: Pension Alerts

IRA Contribution Limits for 2015 – Unchanged at $5,500 and $6,500; 401(k) Limits Increase

Posted by James M. Carlson
Oct 31 2014

Inflation was approximately 1.7% for the fiscal quarter ending September 30, 2014, so many of the IRA and pension limits as adjusted by the cost of living factor have not changed or the changes have been quite small.

The maximum IRA contribution limits for 2015 for traditional and Roth IRAs did not change – $5,500/$6,500.

The 2015 maximum contribution limit for SEP-IRAs is increased to $53,000 (or, 25% of compensation, if lesser) up from $52,000. The minimum SEP contribution limit used to determine if an employer must make a contribution for a part-time employee increases to $600 from $550.

The 2015 maximum contribution limits for SIMPLE-IRAs is increased to $12,500 if the individual is under age 50 and $15,500 if age 50 or older

The 2015 maximum elective deferral limit for 401(k) participants increases to $18,000 for participants under age 50 and to $24,000 for participants age 50 and older.

Contribution limits for a person Contributions limits for a person
who is not age 50 or older who is age 50 or older

Tax Year Amount Tax Year Amount
2008-12 $5,000 2008-12 $6,000
2013 $5,500 2013 $6,500
2014 $5,500 2014 $6,500
2015 $5,500 2015 $6,500

 

 

 

Categories: Pension Alerts