The IRS reminds taxpayers that they still have time to contribute to an IRA for 2016 and, in many cases, qualify for a deduction or even a tax credit. Available since the mid 70s, individual retirement arrangements (IRAs) enable employees and the self-employed to save for retirement. Contributions to traditional IRAs are often deductible, but distributions, usually after age 59½, are generally taxable.
Posts tagged ‘IRAs’
In January, the U.S. Tax Court threw a curve ball in many retirement planning strategies. The court held that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer has. The court found that the one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA owned by an individual but instead applies to all IRAs owned by a taxpayer. The court’s decision was a departure from a long-time understanding of IRS rules and publications and, for several weeks after, it was unclear what approach the IRS would take. Now, the IRS has announced that it will follow the court’s decision and revise its rules and publications. Everyone contemplating an IRA rollover needs to be aware of this important development.
Individuals have traditionally enjoyed flexibility in moving their retirement savings from one type of retirement plan to another type of plan. A rollover is a transfer of a distribution received from an IRA or other retirement plan by the recipient to another IRA or type of retirement plan owned by the same recipient. A rollover has important tax considerations. The amount distributed is not included in the recipient’s income if the distribution is transferred to an eligible arrangement within 60 days after it is received. In certain cases, the 60-day period may be extended by the IRS.
Generally, only the owner of the IRA may roll over an amount. A surviving spouse who receives a distribution after the death of the account owner can make rollovers to the same extent as the account owner could have. There are also special rules for Roth IRAs and other retirement arrangements.
Tax Court case
In Bobrow, TC Memo. 2014-21, a married couple received distributions from more than one IRA in 2008. The couple claimed that they could make more than one tax-free rollover. The Tax Court disagreed.
The court found that Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may make a nontaxable rollover contribution. The one-year limitation is not specific to any single IRA a taxpayer has but instead applies to all of the taxpayer’s IRAs. If Congress had intended to allow individuals to take nontaxable distributions from multiple IRAs per year, the court found that Code Sec. 408(d)(3)(B) would have been worded differently.
Immediately after the decision, many benefits professionals pointed out that the IRS’s rules and publications appeared to be contrary to the court’s decision. In particular, many taxpayers noted that IRS Publication 590, Individual Retirement Plans, seemed to say that multiple rollovers were permissible if taken from different accounts.
The IRS intends to amend the existing rules and revise Publication 590 to clarify that it will adopt the court’s decision. Additionally, many IRA trustees, the IRS explained, may need time to make changes to reflect Bobrow. Therefore, in a relief measure, the IRS will not apply the Tax Court’s decision to any rollover that involves an IRA distribution occurring before January 1, 2015.
A rollover must be distinguished from a trustee-to-trustee transfer. The Tax Court explained in its opinion that individuals who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the one-year limit under Code Sec. 408(d)(3)(B). Transferring funds directly between trustees, the court found, does not result in a distribution within the meaning of Code Sec. 408(d)(3)(A). Since the funds are not within the direct control and use of the participant, they are not considered to be rollovers.
The court’s decision and the IRS’s action may impact your retirement planning. Keep in mind also that trustee-to-trustee transfers are not affected by the court’s decision, which leaves some flexibility intact for planning. If you have any questions about IRA rollovers, please contact our office at (908) 725-4414.
The definitive arrival of the New Year does not spell doom for all tax savings opportunities for 2013. A few options remain to taxpayers:
Taxpayers have until April 15, 2014, to make tax-deferred contributions to a traditional individual retirement account (IRA). The amount any one taxpayer may contribute to an IRA is limited to $5,500 per taxpayer ($6,500 for taxpayers age 50 or older).
This amount begins to phase out after the taxpayer has adjusted gross income (AGI) over a certain amount ($59,000 for single and head of household filers; $95,000 for married filers). The phase out is complete once the taxpayer’s AGI exceeds $69,000 (single and head of household filers) or $115,000 (married filers).
If the taxpayer has already contributed to an IRA for 2013 (including a Roth IRA), the allowed $5,500 contribution is reduced by the amount of those previous contributions.
Taxpayers covered under a high-deductible health plan (HDHP) also have until April 15, 2014, to make tax-deferred contributions to a health savings account (HSA). An HSA is a tax-exempt trust or custodial account established for the purpose of paying the beneficiary’s qualified medical expenses.
Taxpayers who realize they should have been making estimated payments of tax throughout the year can avoid penalties for the fourth quarter of 2013 by making an estimated tax payment on or before January 15, 2014.
Other notable tax deadlines, other than the looming April 15, 2014 deadline for individual returns, include:
March 15: Taxpayers who contributed funds during 2013 to an employer-sponsored cafeteria plan through a flexible spending arrangement (FSA) have until March 15, 2014 to use them on any qualified medical expenses. Generally taxpayers must use all funds contributed to an FSA before the end of the year, unless their employer has amended the cafeteria plan to allow a grace period up until March 15. Taxpayers who are unsure of whether or not their flexible spending arrangement provides this grace period should contact their employer.
April 1: Taxpayers that have traditional IRAs are required to start taking minimum distributions from their IRAs in the year in which they turn age 70½. These are called required minimum distributions (RMDs), and they are calculated based on the account holder’s life expectancy. RMDs are required for traditional IRAs, but not Roth IRAs.
Taxpayers who just turned 70½ during 2013 may delay the first payment until April 1, 2014. However, for all years thereafter, the taxpayer must take the RMD by December 31 of the tax year. This means that a taxpayer who delays his or her first RMD payment until April 1, 2014, will be required to report two RMDs in his or her 2014 income.
Account owners who do no withdraw the full RMD amount by the deadline will be liable for tax at the rate of 50 percent on the amount not withdrawn
For more information on the upcoming tax return filing season, please contact our offices at (908) 725-4414.