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.