Warning on IRA Rollovers: Regulators to Scrutinize Suitability

Threats of heightened regulatory scrutiny have loomed large in the first weeks of 2014, and perhaps no area has received greater attention than the IRA rollover transaction.

Both the SEC and FINRA have issued warnings to advisors who provide guidance to clients looking to roll traditional workplace 401(k) accounts into private IRAs, and this focus on the importance of proper guidance should be keeping all advisors on their toes. For many advisors, this means a new course in IRA rollover compliance is called for, as even the most experienced professionals may find themselves in the dark over the new requirements being ushered in by the industry’s most prominent regulators.

Read the analysis of William Byrnes and Robert Bloink at > ThinkAdvisor <

IRS About-Turns on Approach to One-Per-Year Limit on IRA Rollovers – Trustees beware!

In Announcement 2014-15 that was published in IRB 2014-16 on April 14, 2014, the IRS alerted trustees that it has had a major about turn on how its views the one-per-year limit on IRS rollovers.  It’s view will now be much more restrictive on roll overs.  What brought about the change of thinking?  The January 28, 2014 Tax Court decision of Bobrow v. Commissioner.

Section 408(d)(3)(A)(i) provides generally that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Section 408(d)(3)(B) provides that an individual is permitted to make only one rollover described in the preceding sentence in any one-year period.

Proposed Regulation § 1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs), provide that this limitation is applied on an IRA-by-IRA basis. However, a recent Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period.  The Tax Court stated at page 12:

“The plain language of section 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation laid out in section 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. Section 408(d)(3)(B) speaks in general terms: An individual may not receive a nontaxable rollover from “an individual retirement account or individual retirement annuity” if that individual has already received a tax-free rollover within the past year from “an individual retirement account or an individual retirement annuity.””

The Tax Court continued at page 13, looking at Congress’ intent surrounding the enactment of section 408(d)(3)(B):

“Section 408 was enacted as part of the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, sec. 2002(b), 88 Stat. at 958.  Recognizing that the American workforce had become much more mobile than in previous years, Congress enacted the section 408(d)(3)(A) exemption as a way of providing employees with some measure of flexibility with regard to their retirement planning. However, Congress added the section 408(d)(3)(B) limitation as a way to ensure that taxpayers did not take advantage of section 408(d)(3)(A) to repeatedly shift nontaxable income in and out of retirement accounts.”

Thus, the Tax Court concluded that: “Had Congress intended to allow individuals to take nontaxable distributions from multiple IRAs per year, we believe section 408(d)(3)(B) would have been worded differently.”

The IRS announced that it anticipates that it will follow the interpretation of § 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B). See Rev. Rul. 78-406, 1978-2 C.B. 157.

What Happens Now?

The IRS has received comments about the administrative challenges presented by the Bobrow interpretation of § 408(d)(3)(B). The IRS understands that adoption of the Tax Court’s interpretation of the statute will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which will take time to implement. Accordingly, the IRS will not apply the Bobrow interpretation of § 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015. Regardless of the ultimate resolution of the Bobrow case, the Treasury Department and the IRS expect to issue a proposed regulation under § 408 that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would the regulation be effective before January 1, 2015.

Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts delivers the latest guidance on:

• Estate & Gift Tax Planning
• IRAs
• HSAs
• Capital Gains, Qualifying Dividends
• Non-qualified Deferred Compensation Under IRC Section 409A
• And much more!

Key updates for 2014:

• Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
• Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
• Expanded coverage of Annuities
• New section on Structured Settlements
• New section on International Tax
• More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
  • Life Insurance
  • Health Insurance
  • Estate and Gift Tax
  • Deferred Compensation
  • Individual Retirement Plans