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Tax Reform and Your 401k


If you were following the hubbub of the Tax Reform closely, then you can swipe hanky-to-the-brow because your Employer Sponsored retirement plan had no significant impact.

For business owners

Business owners are at a disadvantage with the pass-through income rule being less advantageous. Depending on the tax bracket of an owner, their positive impact for tax deduction is reduced on contributions (think bonuses they give to employees via 401k vehicle), making it less advantageous than before. Thankfully, there are still creative solutions to maximize the power of the company's retirement plan to keep the company going strong.

For everyone

1. Extension: Paying back a loan and rolling over (after you quit). 

If you have an outstanding loan when you terminate employment (or the Plan terminates), one option you have is what is called an "off set." This means you pay back the loan and then quickly get a full distribution (includes what you paid) and roll it over to an IRA to avoid paying taxes. Under the new law, you have an extension to make that rollover happen. So you can keep the distribution (even in your checking account) and later put it in an IRA or Qualified Plan, as long as you make it happen prior to filing your taxes for that year.   So, if Lissett experienced the loan offset sometime during 2018, she would have until her tax return due date of April 15, 2019 (or, if she extended her return, until October 15, 2019), to deposit the offset funds to an IRA or other employer plan.

2. Denial of Recharacterization of Roth Contributions and Rollover. 

Recharacterized your pre-tax contributions into Roth (or vice versa) and then changed your mind? This is now a one way street. Once you reclassify, it's done.

3. 2016 Disaster areas and distributions

Relief for distributions made before January 1, 2018, to someone whose principal residence was located at any time during 2016 in a federally-declared disaster area and who sustained an economic loss due to the disaster.  Under this relief, the amounts paid out up to $100,000 (less any other distributions previously taken for the 2016 disaster) have access to four advantages not normally available:

  • They are not subject to mandatory withholding or the 10% premature distribution penalty.
  • They are permitted even if such distribution would normally be prohibited under the Code’s operational rules (e.g., 401(k) money that is normally not eligible for in-service distributions prior to age 59½).  (Amendments required to permit this)
  • The income tax bite on the distribution may be spread over three years, rather than totally payable in the year of distribution.
  • The amount distributed (or a lesser amount) may be deposited within three years of the date of the distribution to an IRA, qualified plan, 403(b) plan, or 457(b) plan, in which case it is treated as a nontaxable rollover to the recipient plan.  In other words, no tax will be due on the amount that was distributed and then re-contributed. 

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