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New IRS Ruling Makes Roth IRAs More Profitable for Taxpayers
Author: Scarinci Hollenbeck, LLC
Date: December 30, 2015
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Are Roth IRAs more profitable for the taxpayer?
Many taxpayers are wondering about the impact of the new IRS ruling on Roth IRA total annual contribution limits. According to a National Law Review report, on Oct. 21, the IRS ruling will create fewer limitations on after-tax contributions directly to Roth IRAs when a taxpayer retires, but the annual contribution limit will not increase in 2016.
The new rules make it easier to increase after-tax contributions
These recent changes on Roth IRAs are designed to increase their savings with after-tax contributions. The new IRS rules were established to make after-tax contribution conversions to Roth IRAs easier when taxpayers leave companies. This enables individuals to roll over their pre-tax contributions and earnings into a traditional IRA and convert after-tax contributions into separate Roth IRAs. In turn, the new rules allow the funds to grow free of tax and remain free of tax even on withdrawal.
Although ROTH contributions are made on an after-tax basis, neither the contributions nor the earnings are taxable income when distributed. The law enacted in 2010, as amended in 2012, permit an in-plan rollover on non-Roth account balances. Note that income tax may be due on the converted amount to the extend it is attributable to pre-tax elective deferrals and matching contributions or earnings on non-Roth after-tax contributions. The in-plan rollover will not be subject to an early distribution penalty if the funds remain in the plan for five years.
In planning for the retirement of executives, one must consider that $53,000 Defined Benefit Contribution limit may be used to create future tax free income via ROTH.
The limitations that remain unchanged
The 2016 dollar limitations for retirement plan contributions and various retirement items related to the annual cost-of-living adjustments will remain the same. According to an Accounting Web report, for most taxpayers, the pre-tax elective deferral contribution limit for 401(k), 403(b), most 457 plans and the federal government Thrift Saving Plan will remain up to $18,000 in 2016.
There are other key limitations that will remain unchanged in 2016. For instance, the annual catch-up contribution limit for taxpayers who are over 50 years of age will stay at $6,000. Further, the annual contribution limitations to an IRA will remain unchanged at $5,500.
Another factor that remained unchanged was that the tax deduction for traditional IRA contributions is eliminated for taxpayers who have modified adjusted gross incomes within a specific range.
A final aspect that will remain unchanged is that the adjusted gross income elimination range for a married taxpayer filing a separate return will remain up to $10,000 and any contributions to Roth IRAs will continue to not be subject to annual cost-of-living adjustments.
The overall significance for taxpayers
High net worth taxpayers who have exceeded the limitations of their various other saving options will stand to benefit from the new IRS rule changes. The significance of this new ruling for the ultra wealthy community is that they have the opportunity to increase their retirement savings as they near the end of their careers through “super-funding” options with a bucket of tax-free income.
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New IRS Ruling Makes Roth IRAs More Profitable for Taxpayers
Author: Scarinci Hollenbeck, LLC
Are Roth IRAs more profitable for the taxpayer?
Many taxpayers are wondering about the impact of the new IRS ruling on Roth IRA total annual contribution limits. According to a National Law Review report, on Oct. 21, the IRS ruling will create fewer limitations on after-tax contributions directly to Roth IRAs when a taxpayer retires, but the annual contribution limit will not increase in 2016.
The new rules make it easier to increase after-tax contributions
These recent changes on Roth IRAs are designed to increase their savings with after-tax contributions. The new IRS rules were established to make after-tax contribution conversions to Roth IRAs easier when taxpayers leave companies. This enables individuals to roll over their pre-tax contributions and earnings into a traditional IRA and convert after-tax contributions into separate Roth IRAs. In turn, the new rules allow the funds to grow free of tax and remain free of tax even on withdrawal.
Although ROTH contributions are made on an after-tax basis, neither the contributions nor the earnings are taxable income when distributed. The law enacted in 2010, as amended in 2012, permit an in-plan rollover on non-Roth account balances. Note that income tax may be due on the converted amount to the extend it is attributable to pre-tax elective deferrals and matching contributions or earnings on non-Roth after-tax contributions. The in-plan rollover will not be subject to an early distribution penalty if the funds remain in the plan for five years.
In planning for the retirement of executives, one must consider that $53,000 Defined Benefit Contribution limit may be used to create future tax free income via ROTH.
The limitations that remain unchanged
The 2016 dollar limitations for retirement plan contributions and various retirement items related to the annual cost-of-living adjustments will remain the same. According to an Accounting Web report, for most taxpayers, the pre-tax elective deferral contribution limit for 401(k), 403(b), most 457 plans and the federal government Thrift Saving Plan will remain up to $18,000 in 2016.
There are other key limitations that will remain unchanged in 2016. For instance, the annual catch-up contribution limit for taxpayers who are over 50 years of age will stay at $6,000. Further, the annual contribution limitations to an IRA will remain unchanged at $5,500.
Another factor that remained unchanged was that the tax deduction for traditional IRA contributions is eliminated for taxpayers who have modified adjusted gross incomes within a specific range.
A final aspect that will remain unchanged is that the adjusted gross income elimination range for a married taxpayer filing a separate return will remain up to $10,000 and any contributions to Roth IRAs will continue to not be subject to annual cost-of-living adjustments.
The overall significance for taxpayers
High net worth taxpayers who have exceeded the limitations of their various other saving options will stand to benefit from the new IRS rule changes. The significance of this new ruling for the ultra wealthy community is that they have the opportunity to increase their retirement savings as they near the end of their careers through “super-funding” options with a bucket of tax-free income.