IRS spells out tax exemptions on retirement plan payments

The IRS, after seven years of consideration, has clarified the exemptions to rules that establish whether direct payments from retirement plans to a carrier are taxable.

Retirement advisors will want to take note of the final ruling, particularly those with “public safety officers” as clients – including law enforcement, firefighters, EMTs, chaplains to law enforcement departments and corrections officers.

Distributions from qualified retirement plans used to pay premiums on health, accident and long-term care insurance polices are generally taxable. But the final regulations provide for an exception of up to $3,000 annually for retired public safety officers, and his or her spouse and dependents, when premium payments are made to insurance companies directly from qualified retirement accounts.

All retired workers have a similar exemption of up to $3,000 when direct payments are made from their qualified retirement 401(h) plan to pay for medical insurance in retirement.

Another important exemption relates to all disabled taxpayers who pay disability premiums directly from their retirement plan. The IRS now says distributions of benefits from disability policies are tax-exempt when the benefits are used to continue retirement plan contributions, meaning a disabled worker can continue to fund their retirement with tax-free payments to their qualified retirement plan from their disability benefits. 

The final regulations were published in the Federal Register on May 12. Retirement advisors can wade through the extent of the IRS’s final rulings here. The new tax exemptions on distributions go into effect on Jan 1.  

 

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