by Denise Appleby CISP, CRC, CRPS, CRSP, APA
- Extension of the qualified charitable distribution (QCD) provision until December 31, 2009: The QCQ provision allows IRA owners and beneficiaries to make nontaxable distributions (withdrawals) of up to $100,000 per year from their IRAs , providing the amount is donated to an eligible charitable organization via a direct payment of assets to the charity. For details, see the article Donating Retirement Assets to Charities
- Permitting contributions of qualified settlement income (QSI) to retirement accounts: For this purpose, QSI is defined as any interest and punitive damage awards which are (1) otherwise includible in taxable income, and (2) received in connection with the civil action In re Exxon Valdez, No. 89–095–CV (HRH) (Consolidated) (D. Alaska). This applies to amounts received as lump sum and periodic payments, regardless of whether the amount is received pre or post-judgment or related to a settlement or judgment.
- Time limit for making contributions: The contribution can be made any time before the end of the taxable year in which the QSI was received. For this purpose, the contribution is considered to have been made during the taxable year, if the amount is deposited to the retirement account by the individual’s tax filing deadline for the year, not including any extensions. This is similar to the rules that apply to making IRA contributions.
- Dollar limit on contributions: The contribution amount cannot exceed the lesser of :
- $100,000 , reduced by the amount of QSI contributed to an eligible retirement plan in prior taxable years, or
- the amount of QSI received by the individual during the taxable year.
This means that a QSI contribution cannot exceed $100,000 for any year.
- Tax Treatment of QSI Contributions:
- Exclusion from income for Non-Roth accounts: If a QSI contribution is made to an eligible retirement plan that is not a Roth IRA or a Roth 401(k), the contribution will be excluded from the individual’s taxable income, and will not be considered to be an investment in the account. As such, the amount will be treated similar to a deductible IRA contribution or a pre-tax salary deferral contribution for tax purposes, and will be subject to ordinary income tax when withdrawn from the retirement account.
- Inclusion in income for Roth accounts: If a QSI contribution is made to a Roth IRA or a designated Roth account such as a Roth 401(k), the amount is included in the individual’s taxable income for the year and will be considered an investment in the account. As such, subsequent distribution of those amounts will not be included in the individual’s taxable income
- Rollover Treatment: If a QSI contribution is made to an IRA, the amount is treated as a distribution from an IRA that is rolled over to the IRA within 60-days. If a QSI is made to or any other eligible retirement plan, the QSI is treated as a distribution from an eligible retirement plan ( except an IRA) and a rollover contribution to the receiving retirement plan, within the 60-day period.
- The provision states that for either of these rollover contributions, the transaction is treated as a as being transferred to the receiving retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. What is unclear here is the need for the 60-day language, when the trustee-to-trustee treatment is applied, as trustee-to-trustee transfers are not subject to the 60-day rule.
- No Effect on One-Year Rollover Rule: Despite the rollover treatment of the QSI for IRAs, the once per year limit on IRA-to-IRA rollovers do not apply, and as such, an individual who contributes a QSI is not prohibited from transacting an IRA-to-IRA rollover, unless the IRA was already involved in another IRA-to-IRA rollover during the one-year period.
- No Conversion Limitation: The $100,000 modified adjusted gross income (MAGI) limit on Roth conversions, and the requirement that individuals cannot perform a Roth conversion if their tax filing status is married-filing separately does not apply.
- Definition of Eligible Retirement Plan: For purpose of this provision, the term ‘‘eligible retirement plan’’ means, a traditional IRA, a qualified plan, an IRC § 403(a) annuity plan, an eligible governmental 457(b) plan, and a 403(b) plan.