By Robert S. Keebler, CPA, MST, AEP (Distinguished), CGMA | Volume 2, Issue 6 (June 2014)
Individual Retirement Arrangements (IRAs) are one of the most popular retirement saving vehicles available today. Many of your clients, if not all, will have either (if not both) a Traditional IRA or a Roth IRA. The rules concerning IRAs are vast and continually being further defined. In this article, I will discuss some of the more important IRA developments over the past six months or so.
Bobrow v. Commissioner
In Bobrow v. Commissioner, TC Memo 2014-21, the court interpreted the “limit of one IRA to IRA rollover distribution every twelve months” rule as provided in Section 408(d)(3)(B). The court explained that this rule is not a calendar year test (i.e., there must be at least twelve months between the rollovers, even if done in different calendar years), that the distribution date is the benchmark date, not the rollover date, that this limitation does not apply to direct transfers and only effects IRA to IRA rollovers (i.e., qualified plans to IRA rollovers are not counted). Of significant importance, the court held that this one-rollover-per-year rule applies to all of the taxpayer’s IRAs, not to each of his or her IRAs separately (i.e., it applies in the aggregate). This ruling is in direct contradiction with IRS Publication 590, which applies this limitation on an IRA by IRA basis.
IRS Announcement 2014-15
Following the decision in Bobrow, the IRS issued Announcement 2014-15 which addresses the one-rollover-per-year limitation as it applies to IRAs and provides transition relief for owners of IRAs. The IRS stated in this announcement that it anticipates that it will follow the court’s interpretation of the one-rollover-per-year rule (and thus, the aggregation rule) as defined in Bobrow. As a way to provide taxpayers with some transition relief, the IRS announced that it will not apply the Bobrow aggregation interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015. Further, this interpretation does not affect the ability of an IRA owner to transfer funds from one IRA directly to another via trustee to trustee transfer because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.
Clark v. Rameker
In Clark et ux. v. Rameker et al., No. 13-299, the Supreme Court of the United States granted certiorari on this case so we will finally get a decision on whether inherited IRAs are exempt from a debtor’s bankruptcy estate under Section 522 of the Bankruptcy Code, 11 U.S.C. § 522. The 7th circuit Court of Appeals in Clarkreversed the district court’s decision that had reversed the bankruptcy court’s decision and allowed an inherited IRA to be exempt from the bankruptcy estate. In its decision, the Court of Appeals stated that an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner’s retirement. This ruling conflicts with a 5th Circuit holding in Chilton v. Moser, No. 11-40377 (5th Cir. Mar. 12, 2012). Also see In re Nessa, 426 B.R. 312, 314 [105 AFTR 2d 2010-1825] (8th B.A.P.2010).
PLRs 201318033 & 201338028
In PLRs 201318033 and 201338028, the IRS once again allowed an estate to transfer, in-kind, an IRA payable to the estate as beneficiary to inherited IRAs for the benefit of the estate beneficiaries. The IRS has previously allowed similar transactions where an IRA was payable to a trust that paid outright to individuals. This allows a fiduciary to pay out the benefits in the most tax efficient manner so that the estate or trust can be closed.
Daley v. Mostoller
In Daley v. Mostoller, No. 12-6130, 2013 U.S. App. LEXIS 12138 (6th Cir. June 17, 2013), the 6th Circuit Court of Appeals determined that an IRA qualified for bankruptcy estate exemption under 11 USC Section 522(b)(3)’s provision for tax-exempt retirement plans despite the fact that, by signing the Client Relationship Agreement, the debtor granted a lien in his IRA to Merrill Lynch. The debtor did not, however, use his IRA to obtain credit from Merrill Lynch. This decision reversed the decisions of the bankruptcy and district courts.
In PLR 201339002, the IRS denied the taxpayer a waiver of the 60-day rollover requirement. The taxpayer had received a distribution from her IRAs but alleged that the bank failed to advise her of the 60-day rollover requirements. After she received the IRA distributions and shopped around for a more favorable interest rate, she was informed by a second bank that they could not accept one of her checks as a rollover contribution because it was past the 60-day rollover period. While the evidence indicated that the taxpayer withdrew from her IRA with the intent to redeposit the funds into another IRA with a better interest rate, the taxpayer did not demonstrate that the first bank had a duty to inform her of the 60-day rollover requirement. Further, the taxpayer did not present any evidence as to how any of the factors outlined in Rev. Proc. 2003-16 affected her ability to timely complete the rollover. For these reasons the IRS denied her waiver of the rollover period requirement. Compare this PLR with PLRs 201407027, 201406023 and 201404017 where the taxpayer was granted a waiver of the rollover period requirement by the IRS.
Roberts v. Commission
In Roberts v. Commissioner, 141 TC No. 19, in 2008 the taxpayer’s former wife forged withdrawal requests from his IRA and checks were issued pursuant to these requests. Taxpayer did not learn about such distributions until 2009. His former wife had also filed an income tax return for the taxpayer in 2008; which failed to report the IRA withdrawals as income. The court held that taxpayer was not a “payee” or “distributee” within the meaning of IRC Section 408(d)(1). Thus, the taxpayer was not liable for the additional tax on early distributions from qualified retirement plans. However, the court did hold that taxpayer was liable for the accuracy-related penalty to the extent the adjustments he conceded result in a substantial understatement of income tax.
The myRA program recently announced by President Obama is aimed at workers whose employers do not offer traditional retirement accounts. The accounts are intended to function like a Roth IRA and have government backing like a savings bond so the balance will never go down. The following are some of the highlights of the myRA program:
- Workers can invest if they make less than $191,000 a year.
- Employers will not administer or run the accounts; instead they will offer them to their employees if they choose to participate.
- There will not be a tax penalty if the investments are withdrawn.
- Initial investments can begin at $25, while subsequent investments can be as low as $5.
- The accounts can be taken by the employee from one job to another.
- The accounts can be rolled into an IRA at any time.
- The accounts will have the same variable interest rate return as the Thrift Savings Plans.
- Once an employee’s account grows to $15,000, the myRA must be rolled over into a Roth IRA.
NUA and NIIT
On a related note, the new 3.8% Net Investment Income Tax’s (NIIT) impact on Net Unrealized Appreciation (NUA) is a red hot issue right now. Our models show there is tremendous merit to structuring the distribution of highly appreciated employer securities from your client’s employer’s qualified plans to minimize the tax consequences.
A quick example of how the NIIT impacts NUA: Taxpayer has a $20,000 basis in his or her employer’s securities. When the securities are distributed from his or her qualified plan, the fair market value of the securities is $100,000. As to that $80,000 of NUA, the NIIT does not apply. If, however, the taxpayer later sells the securities for $125,000, the NIIT will apply to $25,000 of the gain. Our models show that depending on how this distribution is structured, the taxpayer may be able to save a significant amount in tax liability.
Above are just some of the more significant IRA developments over the last six months; it is not an all-inclusive list. As you can see from just the list above, some of these IRA developments will or could have a significant impact on your clients’ IRAs. Keeping abreast of the numerous and frequent IRA developments on a timely basis is a must for any retirement and/or estate planning practitioner.
Robert Keebler will be presenting a special 90-minute presentation entitled, “Special Tax Planning for Large IRAs” on Tuesday, June 10th at 9am Pacific (12pm Eastern). For more information and to register, click here.
Also, we’re pleased to announce a new speaker, nationally renowned CPA, Mike Jones, who will be giving a special presentation entitled, “Explaining the Inherited IRA Rules to Your Clients” on Wednesday, June 25th at 9am Pacific (12pm Eastern). As a special bonus, for the first 25 registrants, you will receive a complimentary copy of Mike’s new book entitled,Inheriting an IRA (a $34.95 value!). For more information and to register, click here.
ABOUT THE AUTHOR
Robert S. Keebler is a partner with Keebler & Associates, LLP. He has received the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planning Counsels and has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States. Mr. Keebler is the past Editor-in-Chief of CCH’s magazine, Journal of Retirement Planning, and a member of CCH’s Financial and Estate Planning Advisory Board. Mr. Keebler frequently represents clients before the National Office of the Internal Revenue Service (IRS) in the private letter ruling process and has received over 150 favorable private letter rulings. Mr. Keebler is nationally recognized as an expert in family wealth transfer and preservation planning, charitable giving, retirement distribution planning and estate administration and works collaboratively with other professionals on academic reviews and papers, as well as client matters. He can be reached at (920)593-1701 or at [email protected].