In recent years, there have been several legislative changes, most notably the Tax Cuts and Jobs Act of 2017 (“Tax Cuts Act”) and the Bipartisan Budget Act of 2018 (“Budget Act”). These changes can have an impact on individuals’ personal and business tax reporting, as well as on their retirement accounts. The 2019 Tax Reform changes are not easy to follow so below is a summary of the important changes.
Close – But No Cigar
The following tax reform provisions have been floating around for the last few years, but were not part of any recent tax reform legislation:
- No “Rothification” other than the repeal of recharacterization for Roth IRA conversions (discussed below). There was some fear that a provision in the tax reform bill would require all IRAs to be Roth IRAs, but this was never included.
- There is no reduction in contribution, benefit, or compensation limits
- No overall limit on tax benefits
- No wage cap on pre-tax catch-up contributions
- Zero changes to special contribution rules for 403(b) and 457(b) plans
- No major changes to nonqualified deferred compensation
Done Deal – New Tax Reform Changes & Impact on your Retirement Accounts in 2019:
The following important tax reform provisions were part of the Tax Cuts Act and Budget Act and could impact your retirement account in 2019:
Extra time to pay off a 401(k) loan at termination of employment. Prior to 2018. if you had an outstanding loan when you left your job or the 401(k) plan ended, you had 60 days to repay the loan in full or it would be treated as a distribution. However, you now have until your federal income tax filing deadline, including extensions, to pay back the outstanding loan balance.m
Roth IRA re-characterizations eliminated for conversions. Once you elect to do a Roth IRA conversion, you cannot undo it. Some taxpayers in the past would do a Roth IRA conversion and if the investment was not successful, they would undo the conversion so as to not be stuck paying tax on an inflated value.
As stated on the IRS website:
“…a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.”
529 plans can be used for “qualified higher education expense” at an elementary or secondary tuition expenses, up to $10,000 per year. 529 plans can be rolled into tax-advantaged savings accounts for individuals with disabilities and their families.
Chained Consumer Price Index (CPI) used for IRA and HSA limits, which could slow down their increases. Chained CPI grows more slowly because the index accounts for substitution
Removed the required six-month suspension of deferral and employee contributions after receipt of a hardship withdrawal. No longer do you have to wait the six months to resume contributing to your 401(k) plan after taking a hardship withdrawal.
Amends Section 401(k) of the Internal Revenue Code to allow hardship withdrawals without regard to whether participants have first obtained available plan loans. Basically, you don’t have to take a 401(k) loan (if available) before taking a hardship withdrawal.
The 2019 tax reform changes will effect many retirement plans and savers. It’s important to know what you can and can’t do with your IRA, 401(k) and other plans. You don’t want to run afoul or the IRS rules. However, you do want to take advantage of the opportunities afforded to you.