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

9 retirement savings tax tips

You might be able to muddle through retirement without knowing each and every line of Uncle Sam’s tax code. But you’ll likely give the federal government more than its fair share of your nest egg if you don’t know what William Byrnes, author of National Underwriter’s Tax Facts, calls the big retirement plan tax facts.

Read the USA Today analysis, written by renown financial journalist Robert Powell:  “Stretching the retirement savings available for an additional 20 years of life expectancy requires correctly managing the complex retirement taxation rules established by Congress and the IRS,” says Byrnes, who is also associate dean at the Thomas Jefferson School of Law in San Diego, Calif.

The full analysis is available on USA Today at 9 retirement savings tax tips!  USA TODAY and USATODAY.com reach a combined seven million readers daily.

5 Tax Facts for Early Retirement Plan Withdrawals

In Tax Tip 2014-35, the IRS addressed the issue of potential tax penalties for withdrawing money before retirement age from a retirement account.

5 tax tips about early withdrawals from retirement plans:

1. An early withdrawal normally means taking money from a retirement plan before age 59½.

2. If a taxpayer makes a withdrawal from a plan, that withdrawal amount must be reported to the IRS on the annual tax return.  Income tax may be due as well as an additional 10 percent tax on the amount of the early withdrawal.  The taxpayer may need to file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts”, with the annual federal tax return.

3. The additional 10 percent tax does not apply to nontaxable withdrawals.  Nontaxable withdrawals include withdrawals of the cost to participate in the retirement plan.  The cost includes the taxpayer’s after-tax contributions before the contributions are contributed to the plan.

4. A “rollover” is a type of nontaxable withdrawal. Generally, a rollover is a distribution to the taxpayer of cash or other assets from one retirement plan that is then immediately contributed to another retirement plan.  The taxpayer has 60 days to complete the rollover to make it tax-free.

5. There are many exceptions to the additional 10 percent tax. Some of the exceptions for retirement plans are different from the rules for IRAs.

Exceptions to Tax on Early Distributions

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax and report the amount to the IRS for any early distributions, unless an exception applies.

The distribution will NOT be subject to the 10% additional early distribution tax in the following circumstances:	Exception to 10% Additional Tax
	Qualified Plans (401(k), etc.)	IRA, SEP, SIMPLE IRA* and SARSEP Plans	Internal Revenue Code Section(s)
Age
after participant/IRA owner reaches age 59½	yes	yes	72(t)(2)(A)(i)
Automatic Enrollment
permissive withdrawals from a plan with auto enrollment features	yes	yes for SIMPLE IRAs and SARSEPs	414(w)(1)(B)
Corrective Distributions
corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely	yes	n/a	401(k)(8)(D), 401(m)(7)(A), 402(g)(2)(C)
Death
after death of the participant/IRA owner	yes	yes	72(t)(2)(A)(ii)
Disability
total and permanent disability of the participant/IRA owner	yes	yes	72(t)(2)(A)(iii)
Domestic Relations
to an alternate payee under a Qualified Domestic Relations Order	yes	n/a	72(t)(2)(C)
Education
qualified higher education expenses	no	yes	72(t)(2)(E)
Equal Payments
series of substantially equal payments	yes	yes	72(t)(2)(A)(iv)
ESOP
dividend pass through from an ESOP	yes	n/a	72(t)(2)(A)(vi)
Homebuyers
qualified first-time homebuyers, up to $10,000	no	yes	72(t)(2)(F)
Levy
because of an IRS levy of the plan	yes	yes	72(t)(2)(A)(vii)
Medical
amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65)	yes	yes	72(t)(2)(B)
health insurance premiums paid while unemployed	no	yes	72(t)(2)(D)
Military
certain distributions to qualified military reservists called to active duty	yes	yes	72(t)(2)(G)
Returned IRA Contributions
if withdrawn by extended due date of return	n/a	yes	408(d)(4)
earnings on these returned contributions	n/a	no	408(d)(4)
Rollovers
in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days	yes	yes	402(c), 402A(d)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3)
Separation from Service
the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees in a governmental defined benefit plan)	yes	no	72(t)(2)(A)(v), 72(t)(10)

NOTE: Governmental 457(b) distributions are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.

*25% instead of 10% if made within the first 2 years of participation

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.  Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.