There are numerous important tax changes taking effect in 2015. Some are the result of the Tax Increase Prevention Act of 2014 (TIPA) and other tax legislation. Others are triggered by effective dates in regulations, rulings and other IRS guidance. This article highlights certain non-inflation-indexed tax changes that primarily affect individuals.
One-IRA-rollover-per-year rule. An individual receiving an IRA distribution on or after January 1, 2015, cannot roll over any part of the distribution into an IRA if the individual has received a distribution from ANY IRA in the preceding 1-year period that was rolled over into an IRA. Under the previous rule, the one-rollover-per-year limitation applied on only on an IRA-by-IRA basis. Under the new rule, an individual cannot make more than one nontaxable 60-day rollover within each 1-year period even if the rollovers involved different IRAs.
However, a transition rule is available for distributions in 2015. Under this transition rule, a distribution occurring in 2014 that was rolled over will be disregarded for purposes of determining whether a 2015 distribution can be rolled over so long as the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. In other words, under the transition rule, the new aggregation rule will apply to distributions from different IRAs only if each of the distributions occurs after 2014.
New distribution rule for retirement plans. Beginning January 1, 2015, when qualified plan participants choose to direct their retirement plan distribution to go to multiple destinations, the participants will be permitted to:
(1) roll over the distribution to both a Roth IRA and a non-Roth IRA;
(2) allocate the pre-tax amount of the distribution to the non-Roth IRA and the after-tax amount to the Roth IRA; and
(3) thereby avoid having to pay income tax on pre-tax amounts rolled over to the non-Roth IRA.
Under previous rules, each destination of a retirement plan distribution was considered a separate distribution, and if a participant’s account balance contained both pre-tax and after-tax amounts, the distribution to each destination was deemed to include a pro rata share of pre-tax and post-tax amounts. A participant couldn’t choose to allocate the pre-tax amount to a traditional IRA and the after-tax amount to a Roth IRA.
Under the transition rules, plan sponsors may apply the new allocation rule to distributions made on or after September 18, 2014, and apply a reasonable interpretation of the allocation rules for distributions made before September 18, 2014.
New investment direction rule for 529 plans. Under IRC section 529, a program isn’t treated as a qualified tuition plan (QTP) unless it provides that any contributor to, or designated beneficiary under, the program may not directly or indirectly direct the investment of any contributions (or earnings thereon) to the program. However, for tax years that begin after December 31, 2014, an account contributor or designated beneficiary is permitted to direct the investment of the QTP assets up to two times per year.
ABLE accounts for the disabled may be established. For tax years beginning after December 31, 2014, states are allowed to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts to be used to pay for qualified disability expenses for persons with disabilities. Similar to a QTP, a tax exemption is allowed for an ABLE program. Amounts in an ABLE account accumulate on a tax-exempt (or, in some cases, tax-deferred) basis, and distributions are tax-free if made for “qualified disability expenses.” Except in the case of a rollover contribution from another account, an ABLE program must limit the aggregate contributions from all contributors for a tax year to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015, adjusted annually for inflation).
If you have questions regarding this article or any other tax questions, please contact Jeff Senney.