For those employees who own traditional individual retirement arrangements (IRAs), there is still some time left in 2018 to make some potentially tax-saving moves for 2018. This column discusses three of these moves.
Moves Affecting Required Minimum Distributions (RMDs)
An employee with a Thrift Savings Plan (TSP) account and who will be reaching age 70 during 2019, will not be required to take required minimum distributions (RMDs) from his or her TSP account starting in 2019, provided that the employee continues to work in Federal service during 2019. But if that employee owns traditional IRAs and/or qualified retirement plan money (such as a 401(k) plan that he or she previously participated in when working in private industry), then the employee must take RMDs starting in 2019 from the traditional IRA and qualified retirement plans.
Since the 2019 RMD for a traditional IRA and/or qualified retirement plan RMD is based on the traditional IRAs and qualified retirement plan’s account balance as of Dec. 31, 2018, directly transferring these account balances to one’s traditional TSP before Dec. 31, 2018 will result in no need to take an RMD from these accounts for 2019. This direct transfer (using Form TSP 60) would have to be accomplished before Dec. 31, 2018, so that these accounts have $0 balance as of Dec. 31, 2018.
Converting a Traditional IRA to a Roth IRA in 2019
Converting traditional IRAs to Roth IRAs may make sense for those IRA owners who own traditional IRAs in which their IRA contributions were nondeductible. In performing these conversions, the traditional IRA owner must pay Federal and state income taxes on the portion of the traditional IRA that has not been taxed. Since a nondeductible traditional IRA consists of a nontaxable portion – the contributions (as shown each year the IRA owner contributes to the IRA and filing IRS Form 8606), and a taxable portion – the accrued earnings which are tax-deferred from year to year the IRA owner will pay tax on these accrued earnings upon converting to a Roth IRA. But those nondeductible traditional IRA owners who want to convert to a Roth IRA tax-free by avoiding the pro rata calculation may do so by transferring all of their accrued earnings (and deductible traditional IRA contributions if they also own deductible traditional IRAs) to their TSP account by year-end using Form TSP 60. Then, within a few days into 2019, the IRA owner can convert all of the nondeductible traditional IRAs to a Roth IRA tax-free. This is because as of Dec. 31, 2018, the nondeductible traditional IRAs would have consisted only of already-taxed contributions.
Taking Advantage of the Net Unrealized Appreciation Tax Break
Those Federal employees who previously participated in an employer-sponsored employer stock option plan (ESOP) may want to consider withdrawing the entire stock from the ESOP as part of a qualifying lump-sum distribution and held in a taxable account. In so doing, only the original cost of the stock is taxable upon its distribution. The stocks’ appreciation is not taxed until the stock is sold. When the stock is sold, the appreciation is taxed at the favorable long-term capital gain tax rates (0, 15, or 20 percent) and not ordinary tax rates. To qualify for the “net unrealized appreciation” (NUA) tax break (called “NUA qualification”), all the stock must be withdrawn from the ESOP within one calendar year. Assuming a Federal employee no longer works for the employer sponsoring the ESOP, the employee would be eligible to withdraw all of the stock by Dec. 31, 2018. If some stock were already withdrawn earlier in 2018, then the balance of the stock must be withdrawn by Dec. 31, 2018, in order to get “NUA qualification”. If not, then the full value of the stock withdrawn will be taxable and taxed at ordinary income tax rates.
Annuitants and Employees Over Age 70 Taking Advantage of Qualified Charitable Distributions (QCDs)
Qualified charitable distributions (QCDs) will be more available than ever since under the Tax Cuts and Jobs Acts of 2017 (TCJA, the current tax law affecting individuals between now and 2025), most individuals over age 70 will no longer be itemizing on their income taxes because of the new limitations on certain itemized deductions and the and elimination of some itemized deductions. They will instead be using the standard deduction (which, for 2018, will nearly double what it was in 2017 for all tax filing categories). QCDs allow charitable donations to be made directly from a traditional IRA, effectively gaining the deduction because the IRA distribution will be excluded from income and the distribution counts toward satisfying any RMD not yet taken for the year. But the QCD is allowed to be made only from a traditional IRA for owners and beneficiaries age 70.5 and older. A QCD is not allowed to be from the TSP. TSP participants who have retired from Federal service and who wish to take advantage of QCDs must first transfer their TSP to a traditional IRA. The QCD can then be made from the IRA directly to the charity. To qualify for 2018, the QCD must be completed by Dec. 31, 2018.
Written by Edward Zurndorfer, who is a Certified Financial Planner™, Chartered Financial Consultant, Chartered Life Underwriter, Certified Employee Benefits Specialist and Enrolled Agent in Silver Spring, MD. He is the owner of EZ Accounting and Financial Services, an accounting, tax preparation, and financial planning firm also located in Silver Spring, MD. He is a seminar speaker at Federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. He is also a weekly columnist for MyFederalRetirement.com. Raymond James is not affiliated with and does not endorse the opinions or services of FEDZONE or Edward A. Zurndorfer or any of the above-listed organizations. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Edward A. Zurndorfer, and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not offer tax or legal services. You should discuss tax or legal matters with the appropriate professional. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Serving Those Who Serve is not a registered broker/dealer and is independent of Raymond James Financial Services