The Administration has released its Revenue Proposals for Fiscal Year 2015. Five of them affect retirement plans and individual retirement accounts. Two are relief provisions, two would substantially reduce the benefits of retirement plans and IRAs and one would limit the extent to which participants and IRA owners could take advantage of retirement plans and IRAs.
These two proposals would reduce the benefits of retirement plans and IRAs.
1. Five-year rule for non-spouse beneficiaries. A non-spouse beneficiary of a qualified plan or IRA can generally take distributions over his life expectancy. The Administration proposes to require non-spouse beneficiaries to take distributions over no more than five years. This proposal affects participants and IRA owners dying after 2014. There would be an exception for a beneficiary who’s disabled, chronically ill, not more than 10 years younger than the participant or IRA owner or a minor child.
This would substantially reduce the benefits of qualified plans and IRAs. One of the major benefits of qualified plans and IRAs is the ability to stretch distributions over the beneficiary’s life expectancy.
This was in the fiscal year 2014 proposal, but wasn’t enacted.
Under the 1987 proposed regulations, a participant or IRA owner had to choose between term certain and recalculation of life expectancy (or a hybrid method). Under the recalculation method, if the spouse wasn’t the beneficiary, the remaining benefits were payable soon after death. In many cases, the solution was to leave the retirement benefits to a charitable remainder trust. In that way, the income taxation could be stretched out over the lifetime of the beneficiaries. If this proposal is enacted, that solution may be revived.
2. Required distributions from Roth IRAs during lifetime. An IRA owner must take distributions from a traditional IRA on reaching the required beginning date (generally, the April 1 after the year in which he reaches age 70 ½). However, an IRA owner needn’t take distributions from a Roth IRA during lifetime.
This is one of the major benefits of converting to a Roth IRA.
The Administration proposes to require IRA owners to take distributions from Roth IRAs in the same way as in the case of traditional IRAs. This proposal affects taxpayers attaining age 70 ½ after Dec. 31, 2014.
1. A 60-day rollover for inherited retirement benefits. A participant, IRA owner or spouse can take distributions of qualified plan or IRA benefits and roll them over into another qualified plan or IRA within 60 days. However, a non-spouse beneficiary can’t do so other than by direct trustee-to-trustee transfer.
This has been a trap for the unwary.
The Administration proposes to permit non-spouse beneficiaries to roll distributions over to an inherited IRA within 60 days, effective for distributions after 2014.
This was included in the fiscal year 2012, 2013 and 2014 revenue proposals, but wasn’t enacted.
2. Exempting certain participants and IRA owners from having to take distributions. Participants and traditional IRA owners must generally begin taking distributions on reaching age 70 ½.
The Administration proposes to exempt participants and IRA owners, as well as beneficiaries of deceased participants and IRA owners, from having to take distributions if their retirement benefits don’t exceed $100,000 (to be indexed for inflation). The requirement to take distributions would be phased in for individuals with benefits between $100,000 and $110,000.
There was a similar proposal for fiscal years 2012, 2013 and 2014 for participants and IRA owners, but it had a $50,000 limitation in the fiscal year 2012 proposal and a $75,000 limitation in the fiscal year 2013 and 2014 proposal. The fiscal year 2014 proposal was extended to beneficiaries of deceased participants and IRA owners, as is the fiscal year 2015 proposal.
Limitation on Retirement Benefits
The Administration proposes to limit contributions to retirement plans. If a taxpayer already has retirement benefits in excess of the amount necessary to provide the maximum annuity permitted under a defined benefit plan (currently $210,000 per year payable as a joint and 100 percent survivor annuity beginning at age 62), he would be prohibited from making additional contributions or receiving additional accruals.
This amount is approximately $3.2 million at age 62.
However, amounts already in a retirement plan could continue to grow.
If this proposal is enacted, a participant or IRA owner could still effectively make an additional contribution by converting to a Roth and paying the tax on the conversion out of other assets.
This was included in the fiscal year 2014 proposals but wasn’t enacted.