"The Pension Specialists" Blog

Major Tax Bill Signed Into Law by President On December 22, 2017

President Trump signed a major tax bil into law on December 22, 2017. The law changes generally go into effect on January 1, 2018.

There are three changes impacting IRAs - two are direct and one is indirect.

In 2018 and subsequent years an IRA owner who makes a Roth IRA conversion contribution from a traditional IRA, SEP IRA or SIMPLE IRA is no longer eligible to reverse the conversion by recharacterizing it. The practical effect is - the individual will have to include the distribution in their taxable income and pay the associated tax liability. Conversions made in 2017 may still be recharacterized in 2018 as long as the standard conversion rules are met. Annual contributions to either a traditional IRA or a Roth IRA for 2018 or later years may still be recharacterized.

It is also possible that a person may convert non-Designated Roth funds within a 401(k) plan to a Roth IRA. This is a type of Roth IRA conversion. Your institution as a Roth IRA custodian might receive such contributions. The tax bill did not expressly amend the statutory pension plan provisions authorizing such conversions or the authority for recharacterizing such conversions. Most commentators believe Congressional intent was that no ROTH IRA conversions once made may be recharacterized. If this situation arises at your institution, further research will need to be done.

As discussed in the September newsletter special tax relief is granted to IRA owners and pension plan participants who were victims of hurricanes Harvey, Irma, or Maria. The new tax bill expands the tax relief. Rather than applying only to the victims of the three hurricanes, it applies to victims of any federally declared disaster occurring in 2016 or 2017.

The indirect law change impacting IRAs has to do with a change (i.e. expansion) in the rollover rules. There is a new rollover rule for certain 401(k) participants. Some 401(k) plans are written to allow participants to instruct to have loan made to themselves from their 401(k) account.

For example, Jane Doe has $40,000 in the 401(k) and she borrows $10,000. She quits her job and is to be distributed her 401(k) balance. She directly rolls over the $30,000 in her 401(k) account. She needs to repay the $10,000 loan. Under the old law she was considered to have been distributed the $10,000. She had 60 days to roll it over. If she couldn't, she had to include the $10,000 in her income.

The new law allows her to repay the $10,000 by her tax filing deadline rather than the standard 60 day period.