PATH Retirement Plan Provisions

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act, which contains two retirement plan changes.

Rollovers into a SIMPLE IRA. Rollovers may be made into a SIMPLE IRA from an employer-sponsored retirement plan after the individual has participated in the SIMPLE IRA plan for two years (Section 306). Once this two-year period has been satisfied, a SIMPLE IRA participant may roll funds into the SIMPLE IRA from a qualified plan (such as a 401(k)), a 403(b) plan, or a governmental 457(b) plan, as well as from a traditional individual retirement account (IRA).

Charitable Donation IRAs. The allowable exclusion from gross income for qualified charitable donations from IRAs, which had expired December 31, 2014, has been made permanent (Section 112).

How does a charitable donation from an IRA work? An IRA owner who is 70½ or older may make a direct, tax-free donation to a qualified charitable organization of up to $100,000 per year from his or her IRA. The donated amount is also counted toward satisfaction of the required minimum distribution (RMD) for the year.

Keep in mind that this law does not apply to distributions from qualified plans (such as profit sharing and 401(k) plans). Further, if an individual in a qualified plan wishes to roll over funds to an IRA and then make a charitable donation from the IRA, the RMD rules require that the RMD for the year be taken from the qualified plan first and that only amounts distributed above the RMD amount may be rolled into an IRA.

For example, assume an RMD must be distributed in 2016 from a qualified plan. The RMD must be distributed before funds can be rolled from the qualified plan to a new IRA. Since the funds were not in the IRA on the preceding December 31, they are not subject to an RMD in the IRA for 2016. For 2017, a charitable donation of the IRA RMD may be made based on the December 31, 2016, balance.