Tax Reform Bill Includes IRA Changes | Wolters Kluwer
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  • Tax Reform Bill Includes IRA Changes

    Philip Royce Onward

    Phil Royce, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published January 05, 2018



    Overview

    The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017 and generally effective for tax years beginning after 2017, makes many changes to various tax laws. Among those changes are some that affect individual retirement accounts (IRAs). A change to the recharacterization provision will likely have a significant impact for some IRA owners, while the impact of other changes will likely not be as broad-reaching.

    Changes

    Recharacterization of Traditional IRA Assets Converted to a Roth IRA: Prior to 2018, conversions from traditional IRAs to Roth IRAs, and qualified rollovers from employer-sponsored retirement plans to Roth IRAs, could be recharacterized, in whole or in part, back to traditional IRAs. This rule allowed a taxpayer to change his/her mind about the transaction, avoiding tax on part or all of the conversion or qualified rollover amount by recharacterizing the assets as traditional IRA assets. Beginning with taxable year 2018, recharacterization of conversion and qualified rollover assets will no longer be allowed. However, regular contributions that are made to traditional and Roth IRAs will continue to be eligible to be recharacterized if the recharacterization is done before the taxpayers tax filing due date.

    Note: It is unclear at the time of this writing if conversions and qualified rollovers completed in 2017 can be recharacterized by the appropriate deadline in 2018, or whether the deadline was December 31, 2017.

    Medical Expense Exception to the 10 Percent Additional Tax: Distributions taken from IRAs and employer-sponsored plans by individuals younger than age 59½ are generally subject to a 10 percent additional tax. There are exceptions to the additional tax, one of them being for payment of medical expenses that exceed 10 percent of an individual’s gross income. Under the new law, the floor for distributions taken in taxable years 2017 and 2018 is reduced from 10 percent to 7½ percent.

    New Hazardous Duty Area/Combat Zone: Members of the U.S. Armed Forces serving in certain combat zones or hazardous duty areas are allowed an additional period to make IRA contributions for a prior year. That period is the time the participant was in the designated zone or area plus at least 180 days. There is special reporting for these contributions. The new law adds an additional hazardous duty area to the list for armed forces members serving in the Sinai Peninsula of Egypt. We expect the Internal Revenue Service (IRS) to provide the information necessary to report these prior year contributions in the 2018 Instructions for Forms 1099-R and 5498.

    2016 Disaster Area Distributions: Current law provides special tax treatment for retirement plan distributions taken by taxpayers affected by Hurricanes Harvey, Irma, and Maria. The special tax treatment includes the ability to spread the income tax on the distribution over a three-year period, avoid the 10 percent early withdrawal penalty, and roll the distribution back into a retirement plan within three years after having taken it. Essentially, the new law includes 2016 presidentially declared disaster areas to the list of affected areas eligible for the special tax treatment.

    IRA Fees as an Itemized Deduction: The new law removes the deduction for miscellaneous expenses. Some IRA fees may have been deductible as a miscellaneous expense, but beginning in taxable year 2018 no deduction would be allowed.

    Taxable Alimony as Compensation: The new law removes the deduction for alimony payments. As a result, alimony received through a divorce or separation instrument executed, or certain instruments modified, after December 31, 2018 will not be taxable to the recipient, and therefore will not be considered compensation for purposes of making an IRA regular contribution.

    Rollovers of Loan Offset Amounts to an IRA: The new law provides for an extended rollover period for certain loans considered distributed from an employer-sponsored retirement plan. For example, if an individual severs employment with a company while carrying an outstanding loan balance in his/her employer-sponsored retirement plan, the loan balance is considered distributed and such amount could be rolled over to an IRA by the individual’s tax return due date for the tax year considered distributed. Under prior law, the individual was subject to the 60-day rollover rule.

    Conclusion

    Elimination of the recharacterization provision for conversions and qualified rollovers could have a significant impact on certain IRA owners. The other provisions explained above will likely affect only a small percentage of IRA owners, and with the exception of disaster distributions, involve smaller dollar amounts. Prior to taking any action with regard to these new rules, an IRA owner should consult his/her tax professional for advice regarding the specific effect of these changes to his/her tax plan.

    Next Steps

    From application documents and disclosures to training and account owner educational materials, we have your IRA needs covered. Visit our Tax Reform resources.



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