Top IRA Rulings of 2015

Here are two of last year’s top rulings

Top IRA Rulings of 20152015 produced numerous new laws, IRS actions, and court decisions that affected IRAs and other retirement accounts. Here are two of the top rulings of 2015: The New Age 50 Exception & Social Security Strategies Eliminated

Distributions from retirement plans before age 59½ typically trigger a 10% penalty, but there are some exceptions to that age requirement. For instance, participants in employer-sponsored qualified plans avoid this penalty if they separate from service during or after the year in which they reach age 55.

A lower threshold at age 50, applies to certain public safety workers. “The age 50 exception will become much broader, starting in 2016, thanks to legislation passed in 2015,” says Jeffrey Levine, Chief Retirement Strategist for Ed Slott & Co. This exception applies to individuals who separated from service when they were 50 or older.

“In previous years,” says Levine, “the age 50 exception applied to withdrawals from a governmental defined benefit pension plan by a qualified public safety employee of a state or local government agency.” Covered workers included police officers, firefighters, and emergency medical personnel.

“The Trade Priorities and Accountability Act of 2015 – yes, a trade bill – broadens the scope of the age 50 exception considerably,” says Levine. “In addition to governmental defined benefit plans, beginning in 2016 the exception also applies to distributions from governmental defined contribution plans.” That includes the federal government’s Thrift Savings Plan.

“In addition,” says Levine, “more workers will be covered. Certain federal public safety workers also can use the age 50 exception for distributions from defined benefit and defined contribution plans, starting in January 2016.” Covered federal employees include specified law enforcement officers, customs and border protection officials, firefighters and air traffic controllers.

In yet another wrinkle, the new law provides that the 10% penalty tax will not apply to people who are receiving substantially equal periodic payments (SEPPs) and later take another distribution under the age 50 expanded exemption. For instance, if a former EMT worker, age 53, started taking SEPPs a couple of years ago and now takes even more money from her government defined contribution plan to cover unexpected expenses, the extra distribution will not be treated as a modification of the SEPPs, so a retroactive 10% penalty won’t be triggered.

Social Security Strategies Eliminated

The Bipartisan Budget Act of 2015 included some provisions that will end certain Social Security claiming strategies. Soon, married couples will no longer be able to use the file-and-suspend plan or restricted spousal applications to boost their overall Social Security benefits. “The new rules don’t directly affect retirement plans,” says Levine. “However, they will have an impact on retirement income for many clients who have not yet begun to collect Social Security benefits.”

If retirees will get less than had been projected from Social Security, they’ll need more cash flow from other sources to maintain the same lifestyle in retirement. “That extra income will probably come from their IRA or other retirement accounts,” says Levine. “Advisors may have to adjust certain clients’ plans for tapping retirement funds.”

Meanwhile, some clients will have time to use the strategies before the new rules take effect. Through April 29, 2016, people 66 or older can still execute the file-and suspend strategy. After that time, suspension requests of one’s benefit will also suspend other benefits based on the same earnings record.

The new law will also halt the “restricted application” tactic, which calls for claiming a Social Security spousal benefit only, at full retirement age or later, and then switching to the individual’s own retirement benefit later. Those who were 62 or older on January 1, 2016, can still do this at full retirement age.

Article credits: Ed Slott’s IRA Advior | © 2016 Ed Slott, CPA | By: Jeff Levine