Western Fraternal Life :: Tax Time is a Great Time to Review Retirement Account Rules

Tax Time is a Great Time to Review Retirement Account Rules

Feb 05, 2016

By Julie Cole, CFP®, FLMI Annuity Product Manager

Three major bills were signed into law in 2015 that affect your retirement accounts. Here are just a few tidbits of the bills details that you may need to know.

1. Qualified Charitable Distributions (QCDs) are back permanently. A maximum of $100,000 per taxpayer can be contributed directly from an IRA to charity, and the distribution will count towards the owner's Required Minimum Distribution (RMD) for the year. In order to be considered a QCD, the following conditions must be met:

    • The IRA account holder must be age 70½ or older as of the date of the distribution.
    • The distribution must be made to public charities, not donor-advised funds or supporting organizations.
    • The full payment to the charity would have to qualify as a charitable contribution.
    • The distribution must be a direct transfer from the IRA trustee to the charity, not a reimbursement to the IRA owner for gifts they made previously on their own.

Without the QCD rules, a taxpayer would take a distribution from their IRA (which would then be included in their adjusted gross income), donate the same dollar amount to a charity, and offset the IRA income by claiming an itemized deduction for the donation. In many cases, the two amounts would offset each other, and the taxpayer's taxable income would be unaffected. However, many retirees don’t have enough itemized deductions (so they take the standard deduction) and don’t get any tax benefit from charitable deductions.

2. The "Age 50 Exception" allows certain state and local public safety workers, such as police, firefighters, and emergency medical service (EMS) workers, to take penalty-free distributions from their government-sponsored defined benefit plans – like a pension plan – if they have separated from service in the year they turn age 50 or later. Under the new law, more public safety workers will qualify for the exception. Certain federally employed public safety workers will also qualify. This includes certain federal law enforcement officers, firefighters, border protection officers, customs officers, and air traffic controllers. The exception is expanded to cover distributions from both defined benefit plans and defined contribution plans, like 403(b) plans.

3. Qualified Education Expenses are expanded. Generally, if you take a taxable distribution from your IRA before you reach age 59½, you will be subject to an additional 10% early distribution penalty. However, an exception to the penalty allows you to take a penalty-free distribution from your IRA if you use the funds for qualified higher education expenses. Qualified higher education expenses include tuition, fees, books, and supplies. The expenses must be for education furnished to you, your spouse, or any child or grandchild of you or your spouse. Prior to the enactment of the PATH Act, if an expense was not required by the school, it was not a qualified education expense. This limitation caused problems in the past for parents who wanted to take a distribution from an IRA and use those funds to pay for a computer for a child attending college. If the computer was not required by the school, it would not be considered a qualified education expense and the distribution would be subject to the 10% early distribution penalty. The PATH Act changes the rules for computer technology and related equipment. The definition of higher education expenses is expanded to include expenses for the purchase of computers and related equipment, software, and internet access expenses, if used primarily by a student during any of the years they are in school. This means you can take penalty-free distributions from your IRA to pay for a computer or other computer-related expenses, even if the school your son or daughter attends does not require a computer as a condition of enrollment. Under the PATH Act, this provision is effective for IRA distributions taken in 2015 and later.

The contribution maximums for 401(k)s, IRA, and Roth IRAs does not change for 2016, but the income limitations were inflation adjusted.

Be sure to make your 2015 IRA contribution before the deadline of April 18th, 2016. Yes, tax filing day has been pushed back because of the federal holiday, Emancipation Day, that usually falls on April 16th and has been pushed back to April 15th. Federal offices will be closed on Friday, April 15th.
Be sure to consult with a tax professional prior to taking any distributions from your retirement funds. Each of us has a unique situation and a tax professional may have suggestions for even more tax efficient ways to accomplish your needs.


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