Changes To Your 457 Plan, Other Accounts in 2015
Courtesy of Congress, Christmas came early this year with some beneficial changes for savers taking effect in 2015. Most changes will be positive, but our lawmakers did leave us with a couple lumps of coal. Some of these changes could directly affect your retirement planning, so please read on.
- Qualified Longevity Annuities given the green light: New rules from the Treasury Department will allow the use of longevity annuities inside of a 457 plan, Traditional IRA, 401(k) and 403(b) plan. Total premiums paid cannot be more than 25% of your total account balance or $125,000 – whichever is less. Formerly, because of different rules that apply to longevity annuities, the concern with Qualified Longevity Annuity Contracts (QLACs) inside of retirement accounts has always been the retirement plan owner would not have to begin payments until long after he or she was subject to the required minimum distribution (RMD) rules. Withdrawals from most retirement plans are required for the year you turn 70 ½. Even if you don’t need the income, and even if the additional income will boost you into a higher tax bracket, Uncle Sam still requires you to take a distribution from your retirement account (with a few exceptions). Under the new Treasury Ruling, QLACs are excluded from your retirement account balance when calculating required minimum distributions, but distributions from the annuity have to begin at the age of 85. This a major shift in the retirement planning arena and is something you may want to consider when planning your retirement income.
- Decreased Creditor Protection for Inherited IRAs: Retirement accounts such as your 457 plan and IRA have good protection from creditors. Unfortunately, the Supreme Court cut back on the protection you can get from your inherited IRA. Up to $1.25 million held within a Roth or Traditional IRA is protected from creditors under federal bankruptcy laws. But a recent Supreme Court case made it so that inherited IRAs are not considered “retirement funds” so the creditor protection given under federal law doesn’t apply to these types of accounts any longer.What does this mean to you? The Supreme Court ruling could change how you decide to leave assets to your kids or other heirs because of the lack of creditor protection that will take effect in 2015. If protecting your beneficiary’s inherited assets from creditors is a concern, one way to protect your heirs and family wealth is to set up a trust with a spend-thrift provision. Since trusts and spend-thrift provisions can get complicated, I’ll address that topic some other time. While the new creditor protection ruling shouldn’t turn you away from leaving your IRA to your kids or others, it’s important that you understand the potential consequences of gifting your IRA when you pass away.
- Limit to the Number of IRA to IRA Rollovers: You’re allowed to take a distribution from your IRA and roll those funds to another IRA, or back to the same account within 60 days of the distributions without income tax or penalty. Prior to 2015, the IRS applied this rule to each IRA that you owned, so if you had three IRAs, you were able to pull money from each one, roll it over to the same or another IRA within 60 days without income tax or the dreaded 10% pre-59 ½ penalty. There was never any question that the Internal Revenue Code allowed for a withdrawal from your IRA every twelve months without taxes or penalties, provided that you put the money back within 60 days of the withdrawal date. But after the recent Babrow v. Commissioner tax court decision, the 12-month rollover limitation now applies to ALL IRAs, meaning that only one 60-day rollover is allowed every 12 months across ALL of your IRAs. Still, even with this new rule, taking advantage of the 60-day rule is something to think about if you’re in a jam or have an investment opportunity that you can’t pass up. Public Retirement Planners is well-versed in IRA to IRA rollovers so be sure to check with them before making this important decision. You can read about this beneficial tax loophole here.
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