It's rare when you can have your tax cake and eat it too. But a new private letter ruling issued by the IRS gives certain older business owners a generous slice. It allows them to preserve the tax benefits of a "grand-father election" made over 20 years ago.
If you made a timely election, you've kept your retirement plan humming while you've continued to work past the normal retirement age.
Strategy: Roll over those funds into an IRA when you retire. Even though you've been able to delay retirement-plan distributions all these years, you still qualify for a tax-free rollover on all or part of your payout. The IRS has approved this technique in the new private ruling.
The new ruling lets you preserve your tax shelter for years to come. You might not have to start taking withdrawals until you're well into your 80s!
Here's the story: Prior to a 1982 tax law, business owners could delay receiving minimum distributions from a qualified plan until age 70 1/2 or their retirement, whichever came later. But the 1982 law said plan participants who own more than 5 percent of the business must start taking withdrawals by age 701/2. (Other employees can still choose to wait until retirement.)
One loophole: The law let business owners make a special election to put off distributions until they retired (IRS Section 242(b)(2)). Owners had to make that election by 1984 and specify the withdrawal terms.
If you made such an election and are ready to retire, you can minimize the tax hit on your large payout. Follow this path:
New IRS ruling: A taxpayer in 1983 made a valid election to put off his plan withdrawals until retirement. Now, he's ready to retire at 85. The election's terms required him to take a lump-sum with-drawal of the entire retirement plan balance.
The taxpayer asked the IRS if he could roll over the plan assets into an IRA. The IRS gave a thumb's up. The taxpayer must begin taking withdrawals by April 1, just as if he had just reached the required beginning date. (IRS LR 200510035)
End result: You can keep the tax deferral going while you continue to work well past age 70 1/2, and then move the funds tax-free into an IRA. The IRA distributions will be spread out over time, so you can reduce your tax liability for the future.