Ahh, tax season. Another year, another slew of forms clients don’t understand. This year, we get the added pleasure of dealing with a redesigned Form 1040 and a new set of schedules. I don’t know about you, but I’m not getting a whole lot of positive comments about the new rules making things simpler.

Despite the many tax simplification efforts, I have seen over the last 30 years, our tax code never seems to get much simpler.

I may tackle the many differences in various qualified retirement plans in a future column, but for now, instead of just complaining, I thought I would highlight a few quirks and offer a few suggestions to make things a little simpler and more consistent.

Make Age-Related Eligibility More Uniform

There are a number of actions that can be taken or are prohibited in the year one reaches certain ages. Here are three examples:

1. Workers cannot contribute to an IRA for the tax year in which they turn 70½.

2. If under age 59½, workers can take money from a 401(k) without a 10 percent penalty if they separate from service in the year they turn 55.

3. Owners of retirement accounts can satisfy their first required minimum distribution by taking money from a retirement account at any point in the year they turn 70½.

However, there are also several provisions that require taxpayers to reach a specific birth date before being eligible to take certain actions. For example, to avoid a 10 percent penalty on a retirement account distribution, one must be past the date one turns 59½. That same date is the trigger for being able to make tax-free distributions of earnings from a Roth IRA (if the 5 year rule is satisfied), and for allowing in-service withdrawals from qualified plans, assuming the plan allows it.

It is curious that some provisions should allow behavior anytime in the tax year while others need to be past a specific date. It seems a lot easier to audit if these were just tax year-based events. The taxpayer would need only provide documentation of their birthdate and not also the date of the transaction.

Another example is that an IRA owner must be past their 70½ birthdate to make a qualified charitable distribution (QCD). Since it is permissible to count QCDs toward the required minimum distribution (RMD) and the RMD can be taken during the year the owner turns 70½ even if before their 70½ birthdate, shouldn’t a QCD taken before the 70½ birthdate be allowed too?

Update QCD Rules 

Speaking of QCDs, I’d love to see a QCD code on 1099-R. The custodians already make the check payable to the organization and not the IRA owner. If they could code it QCD, fewer taxpayers would forget to reduce the taxable amount reported on 1009-R, the IRS wouldn’t have to wonder why the taxable amount is less than the gross distribution when filers fail to indicate it’s a QCD on the return, and institutions, including my firm, would field less calls from clients who think the 1099-R is incorrect.

I realize custodians don’t track non-deductible contributions or make pro-rata rule calculations and I can see why. Tracking that with all the rollovers and account transfers that can occur in a taxpayer’s lifetime would require a lot of inter-institution communication that does not exist today. Maybe that will change. Brokerages must forward basis information for covered securities and insurance companies do similar with 1035 exchanges. Regardless, QCDs are different. They don’t really affect the basis tracking because QCDs are deemed to be purely pre-tax.

As it stands, through the QCD, the code provides those IRA owners over 70½ with a nice incentive to give to charity. That’s great but younger tax payers should be incented to give too. I’d love to see either a modest above the line charitable deduction for all or an expansion of the availability of QCDs to all IRA owners.

Another curious quirk of QCDs comes with inherited IRAs. Currently, if dad is over 70½, his IRA is an acceptable pool of money from which to make a QCD. When dad dies, however, that pool is no longer deemed acceptable if the beneficiary who takes the assets as an inherited IRA is under 70½.

That makes no sense. I think it would be reasonable to allow beneficiaries of inherited IRAs to do QCDs if the original owner was eligible to make those distributions.

IRA Inconsistencies

Like many readers, I was dismayed that the ability to recharacterize a Roth conversion was eliminated in the last tax act. Before 2018, you could wait until as late as Oct 15th of the year following the year of the conversion, even if you had already filed a return. That meant you could convert on January 2^nd and change your mind 21½ months later.

I always thought this particular recharacterization rule was generous, so I wasn’t shocked that lawmakers wanted to tighten that up, but the complete elimination of recharacterizing conversions is overkill to me. It feels like the government is trying to trick people into paying taxes by making them guess what their income and deductions will be.

The code does not require such guess work with other IRA related matters. If you misestimate your income such that you cannot make the type of contribution that was made, recharacterize the contribution or remove the excess contribution before the April filing deadline without much fuss or cost if corrected quickly enough.

The code even recognizes the income estimation problem in other matters. For instance, you don’t have to contribute to a 2018 IRA in 2018. You can wait as late as April 15^th of 2019. This gives taxpayers the ability to see exactly what their income will be and make an appropriate contribution.

Tax preparers and custodians may cringe at this suggestion but why not let Roth conversions fall under the same rules? If recharacterizing a conversion will not be allowed, how about permitting the execution of a 2019 Roth conversion as late as April 15^th, 2020 after the income is determined? Such a provision would eliminate the game of seeing how the investments did after a conversion yet give people the ability to plan better. I wonder how much tax revenue has been lost because people won’t convert due to their uncertainty about the taxes.

Speaking of Roth conversions, why is it permissible for a beneficiary to convert a deceased worker’s 401(k) into an Inherited Roth IRA but a beneficiary of a traditional IRA, or an Inherited IRA, cannot convert any of those account into an Inherited Roth IRAs?

Granted, we haven’t seen many situations in which we were anxious to convert to an Inherited Roth IRA. Inherited Roth IRAs are subject to required minimum distributions (RMD). This means makes the tax-free growth potential less enticing. Moreover, the RMDs mean that clients who are beneficiaries of Inherited IRAs who want to do conversions to Roth accounts should prioritize converting their personal IRAs anyway because such a client’s personal Roth IRAs are not subject to RMDs.

One last item. Let’s sync up the zero rate on long-term capital gains with the lower marginal tax brackets. It was this way for years and made filing and planning so much simpler for everyone.

Now, I am fully aware that I don’t know what I don’t know and my puzzlement about the rationale for some of these rules may be misplaced. I know many of these things are the result of negotiations. To get a piece of legislation done, compromises are made. I understand and I realize several of the differences I highlighted are not big. To me, that is a good reason to eliminate the differences rather than let them stand.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].