As part of a last-minute deal to avoid automatic tax increases and spending cuts that would have kicked in with the new year calendar, Congress has approved, and President Obama has signed, the American Taxpayer Relief Act of 2012 (H.R. 8).
We are very excited to report that lawmakers did not incorporate any tax deduction or exclusion limitations applicable to retirement benefit plans, as was a possibility in the months leading up to the fiscal cliff. The legislation permanently extends ordinary income tax rates for individuals earning less than $400,000 per year (and joint filers earning less than $450,000 per year) and alters capital gains and dividend rates, the estate tax and the Alternative Minimum Tax. We are not in the clear yet, H.R. 8 delays sequestration (automatic government spending cuts) for two months, and when combined with the need to increase the federal debt limit and expiration of the federal government’s funding resolution, we are set up for another critical deadline that may yet include provisions to limit tax incentives for retirement plans.
A New Roth Conversion Opportunity
Under current law, amounts in defined contribution plans may be converted to Roth amounts within the plans, provided that:
1. the amounts in the plans were distributable as eligible rollover distributions (meaning the participant has reached age 59 ½ or has separated service); and
2. the plans otherwise permits regular non-rollover Roth contributions.
More from Lockton: Fiscal Cliff Legislation and Retirement
