Extenders Bill Poised To Make Big Changes: What You Need to Know
By Jeffrey Levine, Director of Retirement Education
Follow Me on Twitter: @IRAGuru4EdSlott
It’s taken almost a full year – literally – but Congress is finally set to pass an appropriations act, which will include the much anticipated extenders bill. However, this isn’t your run-of-the-mill extenders bill. This year’s version of the extenders bill – something of a holiday tradition for many professionals at this point - permanently extends several key tax provisions, including the QCD (Qualified Charitable Distribution) provision that allows certain IRA owners to give IRA funds directly to charity without having to include them in income. But wait... there’s more!
Stuffed into the bill under a section appropriately titled “Miscellaneous Provisions” are several other changes to the tax law – that have nothing to do with the extenders – but that may impact your planning for one or more reasons. The following is a brief summary of some of the most important provisions in the law which are most likely to impact you and your family.
(Editor's Note: Congress did act, and the President signed the PATH Act into law on Friday, December 18, 2015.)
Qualified Charitable Distributions (QCDs) Are Back... “Forever"
The extenders bill will bring back qualified charitable distributions retroactively to January 1, 2015. Although the bill still hasn’t been signed into law, at this point, that’s pretty much just a formality. If you made a “QCD” earlier in the hope that Congress brings back the provision retroactively – as it has every other time it’s expired in the past – you can now rest easy. That distribution will soon become a valid QCD.
There’s more good news too. Never again will you have to wait until mid-December to figure out whether or not you should be making a QCD. The extenders bill brings back QCDs permanently. Of course, as I’ve said before, “permanent” means something different to Congress than it means to you or I. To us, permanent means, well... permanent. Not to be changed. Ever. To Congress, however, permanent just means the way it is until we decide to pass another law to override it.
If you haven’t yet made a QCD for 2015 and want to do so now that there is clarity as to the law, you had better get to work quickly! Charitable distributions must leave your IRA no later than December 31, 2015 in order to be treated as a 2015 QCD. Despite the close proximity between now and the end of the year, there will be no grace period or other extension of that deadline. Remember, QCDs can only be made from IRAs, and only if you are actually age 70 ½ or older at the time of the distribution.
Enhanced Retirement Plan Portability with Roll-ins to SIMPLE IRAs
SIMPLE IRA accounts are subject to some weird rules. One of them is that, for the two-year period beginning when contributions are first deposited into your account, your SIMPLE IRA funds can only be rolled over to another SIMPLE IRA. No other retirement account money you might have, including SEP IRA funds, is subject to the same restrictions. Now, that two-year period will take on even more importance. After your initial SIMPLE contributions have “marinated” in your account for the two years, you will be able to roll any other eligible retirement funds you may have into the SIMPLE IRA as well. This could be beneficial if, for instance, your current employer offers a SIMPLE IRA and you’d like to consolidate accounts from previous employers to one place. Up to this point, only SIMPLE IRA funds have been allowed to be rolled into a SIMPLE IRA account. The change will be effective for contributions made after the bill is signed into law; in other words, the day the funds are deposited into the SIMPLE IRA.
Age 50 Exception to the 10% Penalty is Expanded... Again
Earlier this year, Congress expanded the Age 50 exception to include not just state and local public safety workers, but also a host of federal public safety officials. With the passing of the extenders bill, the list of potential occupations grows again. Beginning in 2016, you may be eligible to take penalty-free distributions from your governmental defined benefit plan and/or your governmental defined contribution plans as long as you separate from service in the year you turn 50 or later and you are a:
- Nuclear materials courier
- Member of the U.S. Capitol Police
- Member of the Supreme Court Police
- Diplomatic security special agent of the Department of State
More Time to Roll Over Bankrupt Airline Payments
Once signed into law, the extenders bill may give you more time to rollover a qualifying payment from a bankrupt airline. In reality, this is a provision of the law that only really applies to you if you were a participant in the American Airlines pension plan when it filed for bankruptcy in 2011. The law doesn’t explicitly state “American Airlines,” but rather discusses airlines that “filed [for bankruptcy] on November 29, 2011.” Needless to say, that’s a fairly limited class of companies, and it’s clear who Congress was talking about.
If you’re the proverbial needle in the haystack here and this applies to you, then you can roll over any or all of the payments into a Roth IRA (as a taxable Roth conversion) within the 180-day period following the signing of this bill. Conversely, you can roll anywhere up to 90% of the payments over to a traditional IRA (as a tax-free rollover) within the same time frame. Why 90%? Beats me!
529 Plan Improvements
Congress has finally caught up with the times and realized that in today’s world, a computer is a requirement for virtually every college student. Believe it or not, up until this point, computers have not been considered qualified education expenses unless they were explicitly required for a class. The reality though, is that while library computers or other options are available, pursuing just about any type of higher education degree is greatly assisted by having one’s own computer. With the passing of the extenders bill, computers become qualified education expenses, along with peripheral equipment, software and even internet access expenses. Other enhancements were made to 529 plans as well, all of which are effective for 2015 and beyond.
ABLE Accounts More Accessible
Late in 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act, creating a new type of tax-preferred account for certain disabled individuals. To this point ABLE accounts could only be opened in the account beneficiary’s (disabled person’s) state of residency (or with a state their resident state contracted with). The extenders bill eliminates that requirement.
As a result, if you want to contribute money to an ABLE account for a child, grandchild or other individual who lives in a state that has been slow to adopt their own ABLE account platform (or contract with another state), or doesn’t have a plan with your desired investment options, you will now be able to establish an ABLE account using the platform created in any state. But don’t go hog wild either. As a general rule, a person may only have one ABLE account established for their benefit. So you typically won’t be able to have an ABLE account open in two states at the same time. The annual ABLE account contribution limitation is the annual gift tax exclusion - $14,000 for 2015.
Other Notable Provisions in the Law
The changes outlined above are hardly the only changes in the extenders bill. Other changes that may impact your planning include:
- Enhanced child tax credit will be made permanent
- Enhanced American opportunity credit will be made permanent
- Enhanced earned income tax credit will be made permanent
- Above-the-line deduction for elementary and secondary educators will be made permanent
- Ability to deduct state and local sales taxes in lieu of state income taxes will be made permanent
- Above-the-line deductions for qualified tuition payments will be renewed through 2016