Holiday Wish List of Tax Code Changes
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
The holiday season is upon us once again. There are a lot of things we associate with this time of year, but one of the most common has to be exchanging gifts with those we love. I can remember, as a child, writing out my wish list each year and the excitement I’d have wondering which gifts I might actually receive. Recalling those days I thought I would once again prepare a wish list, but with a little twist. Below you will find my holiday wish list to Congress and the IRS for changes I’d like to see made to the tax code.
#1 – Get rid of the importance of ½ birthdays
59 ½ is generally the age at which you can take penalty-free distributions from your IRA. This is a “hard date,” meaning that you must actually be 59 ½ on the date you take a distribution in order for it to be penalty free. In addition to 59 ½, there’s also 70 ½, which is the age you are when you must begin taking required minimum distributions (RMDs) from your IRA accounts. Unlike the age 59 ½ rule, the age 70 ½ rule applies to the whole year you turn 70 ½, so the first money distributed from your IRA in that year is automatically deemed to be your RMD and is not eligible for rollover. Seriously folks, is this really necessary? Aren’t the IRA rules and the Tax Code complicated enough without adding in the unnecessary complication of ½ years? I mean, what is it that’s so terrible about nice, easy-to- understand numbers like 60 and 70 that we had to use the oddball 59 ½ and 70 ½ date markers?
#2 – Add a penalty exception for extreme financial hardship
I am not a fan of accessing IRA money before retirement. After all, that’s what the account is supposed to be for, right? But sometimes, people run into tough times that necessitate they dip into their savings unexpectedly. If you withdraw any of your IRA funds before age 59 ½, you are generally subject to income tax and a 10% additional penalty for an early distribution. Unfortunately, that often means that even when people are in the direst of situations, and when every last cent counts, they are hit with a significant penalty merely because they haven’t met some arbitrary age designated by lawmakers decades ago. I believe most people should do a better job of saving for their golden years, but I also understand that sometimes “life happens.” I think the tax code should understand that too.
#3 – Get rid of required minimum distributions
So let me get this straight… You work your whole life, diligently put aside money into a retirement account each year and carefully invest and monitor your portfolio and retirement plan with the help of a team of qualified professionals. Basically, you do everything right. In fact, you do things so right that by the time you’re 70 ½ years old, you have enough money set aside in non-retirement accounts that you don’t need any of your IRA money to live off of. You’d like to leave it alone so it can continue to grow tax-free, but you can’t. You’re 70 ½ and now, whether or not you like it, and whether or not you need it, you’re forced to start taking money out of your IRA to satisfy RMDs. Your taxed on that money, and taking that money may actually cause more of your other money (i.e. Social Security) to become taxable. In my book, that’s not right. Change it.
#4 – Make qualified charitable rollovers a permanent fixture in the Tax Code
OK, I’ll be honest, this one make the list for two reasons. First off, QCDs are a great way to encourage certain IRA owners to donate some of their retirement funds to the qualifying charity of their choice. I think we can pretty much all agree that the more that gets donated to charities, the more good they can do (and the less the government ultimately has to be responsible for). The second reason, to be honest, is a bit selfish (but hey, this is my wish list after all, right?). I am worn out from all of the “Are QCDs coming back?” questions. So far, QCDs have been enacted into law three times and each time, the provision has either been extended at the last moment or has expired and been brought back (retroactively) shortly after. It’s clear our lawmakers like this provision, so why don’t we stop with these temporary measures and just pass a permanent provision?
#5 – Allow IRA beneficiaries to convert inherited accounts
Want to hear what, for my money at least, is one of the dumbest rules in the whole Tax Code? OK, here goes… If you inherit a 401(k) or similar plan account from someone, you can convert your inherited plan funds to a properly titled inherited Roth IRA. On the other hand, if you inherit an IRA from someone, including a SEP or SIMPLE IRA, the account can never be converted to an inherited Roth IRA.
This dichotomy arose out of a series of seemingly unintended consequences of several laws and IRS guidance, most notably the Pension Protection Act. It makes absolutely no sense whatsoever and I can’t think of even one good reason it hasn’t been corrected yet. Let’s put all beneficiaries on an equal playing field.