On November 1, the IRS announced cost of living adjustments for various retirement accounts, including IRAs and 401(k) plans.  The changes are as follows:

  • For the first time since 2013, the IRA contribution limit will increase from $5,500 to $6,000 in 2019. Catch up contributions if you are age 50 or older remain unchanged at $1,000 for IRAs.
  • For 401k plans (and 403(b) plans), the retirement plan contribution amount will increase from $18,500 to $19,000. Catch up contributions for age 50 and older participants remain unchanged at $6,000.
  • The income phase-out for taxpayers making contributions to Roth IRAs will increase from $122,000 to $137,000 for singles and heads of household and for married couples filing jointly, the income phase-out is from $193,000 to $203,000.
  • The limitation on the annual benefit for defined contribution plans (i.e. 401(k) plans and profit sharing plans) will increase from $55,000 to $56,000.
  • The annual compensation limit will increase from $275,000 to $280,000.

On December 3, 2014, the House of Representatives passed legislation that would extend a number of tax breaks for the 2014 tax year.  Senate approval of the bill is likely.  Please click here to view a summary of the Bill (H.R. 5771).

Among the tax break extensions is the tax break for charitable contributions made directly from an IRA, also known as Qualified Charitable Distributions (“QCDs”).  This option provides individuals with a nice alternative to donating to a charity.

The tax break allows an IRA owner to transfer $100,000 annually to a charitable organization without incurring any income tax.  The IRA owner must be age 70 ½ or older and the funds must be distributed directly to the charity.  The QCD also may be used to satisfy the required minimum distribution for the year.

QCDs may not be made to donor advised funds or to supporting organizations and may not be made from employer-sponsored retirement plans.  Although QCDs may be distributed to a charity tax free, they generally do not provide the donor with a charitable deduction.

The planning window for this opportunity is currently limited since the extension only applies for the 2014 tax year and the Senate has not yet approved the Bill.

 

The Internal Revenue Code currently provides a tax break for individuals age 70 ½ or over to make distributions of up to $100,000 from an IRA to a charity and exclude the distributions from taxable income.  This generally results in tax savings compared to either (1) the taxpayer making charitable gifts using other, after-tax assets, or (2) the taxpayer taking a distribution from his or her IRA and then contributing the distributed funds to a charity.  Because the amount distributed from the IRA to charity is not included in taxable income, it is not subject to the 50%/30%/20% of AGI limitations on charitable deductions.

This provision is set to expire on December 31, 2011.  Taxpayers who are planning year-end charitable contributions should consider whether the contribution may be completed using IRA assets.

One component of the 2010 Tax Act enacted on December 17th that did not receive widespread attention was the extension of the direct IRA charitable rollover rules for 2010 and 2011. This provision permits taxpayers 70 ½ and older to donate up to $100,000 directly from their IRAs to public charities without having to account for the distributions as taxable income. Due to the late enactment in 2010, taxpayers are given until January 31, 2011 to make 2010 charitable contributions directly from their IRAs if they so desire. Taxpayers are not permitted to roll back their previously distributed 2010 distributions to their IRAs to take advantage of this provision, nor are taxpayers permitted to undo their 2010 distributions to charity. This provision was first enacted in 2006, but expired at the end of 2009. It is now extended until December 31, 2011.

This year – 2010 – has been the year of the Roth IRA, with new rules in place permitting taxpayers in any income tax category to convert their traditional IRAs to Roth IRAs. There has been a plethora of discussion and commentary on this issue (see our article on this subject at http://www.coleschotz.com/assets/attachments/241.pdf), and generally taxpayers have the decision of weighing whether it is worth it to pay an immediate tax as a result of the conversion in order to come out ahead in the long run as a result of the tax-free growth of the newly created Roth IRA.

As 2011 nears and the prospect of the Bush era tax cuts ending becomes more of a possibility, the case for making a Roth IRA conversion becomes clearer for some taxpayers. If a taxpayer converts in 2010 (i.e., prior to the tax cuts expiring), the taxpayer will pay tax on the conversion at the lower 2010 income tax rates. This assumes the taxpayer will not elect to pay the conversion tax in 2011 and 2012, as is permitted with a 2010 Roth conversion. If the taxpayer does not convert, and is over 70 ½, the required minimum distributions after the tax cuts expire (if they do expire) will be taxed at higher rates. Remember, Roth IRAs during lifetime do not require minimum distributions, so not only will the Roth conversion be taxed at lower rates (assuming the tax cuts expire), but also no minimum distributions will be required post-conversion during the taxpayer’s life.

In addition, taxpayers should consider the effect of the 3.8% surtax imposed on net investment income that was enacted as part of President Obama’s new health care law. While IRA distributions are exempt from the 3.8% surtax, distributions from IRA accounts and future Roth conversions can push income over the threshold amounts, causing other investment income to be subject to the surtax. If the Roth conversion occurs prior to 2013, a taxpayer will have one fewer item of income that could push him or her into the 3.8% surtax.

These are just two more factors to consider when making the Roth conversion decision. And certainly keep an eye on the elections tonight – the outcome could certainly play a role in whether the Bush tax cuts will be extended and if the new health care law will be repealed.