4 Key Rule Changes Affecting Retirement Accounts You Need to Know.

What you don’t know can hurt you. And this truism is never more apt than when it comes to the rules governing retirement accounts. Several rule changes took effect recently that will have a significant impact on traditional and Roth IRAs, and employer sponsored retirement plan accounts. Individuals who own these types of accounts must become familiar with the following new rules now:

1. As of January 1, 2015, IRA owners are limited to one rollover per year.

Under this new IRS rule, an IRA owner can take a distribution from an IRA and roll it over into another IRA account only once per 12 month period, regardless of how many IRA accounts he may own. This rule aggregates traditional IRAs and Roth IRAs together, so one cannot perform a rollover between traditional IRAs and then perform a rollover between Roth IRAs within the same 12 month period. This is a significant change to the way the IRS has treated multiple rollovers generated by a 2014 United States Tax Court decision. Violate this rule and the second rollover will be treated as a taxable distribution, which will result in the imposition of income taxes (and the dreaded 10% early withdrawal penalty if the account owner is younger than age 59½).

Excepted from this new rule are direct trustee-to-trustee transfers, rollovers from employer sponsored qualified plans [such as 401(k), 403(b), etc.], and Roth conversions.

2. Inherited IRAs are not protected in bankruptcy.

In 2014 the United States Supreme Court ruled that funds in an inherited IRA are not protected in bankruptcy from the claims of the IRA beneficiary’s creditors unless a state law provides a specific exemption (currently only a few states provide this type of exemption, and Michigan isn’t one of them). Individuals with larger IRA or qualified plan account balances may need to rethink their retirement account beneficiary designations in light of this ruling. In circumstances where a child or other beneficiary may have financial trouble, it may be prudent to make other arrangements to enhance creditor protection for inherited account balances.

3. QLACs get the go-ahead.

What is a “QLAC?” It is a qualified longevity annuity contract, which can enhance income security for those  who may be worried about outliving their money in retirement. These deferred income annuities can be purchased through IRAs and qualified plans (within limits) and the contract values will be exempt from RMD rules until age 85, when distributions from the QLAC must begin. A QLAC will do two things: First, distributions from the account can be delayed until age 85, thus allowing for greater tax deferred growth and guarantying an income stream for life; and second, the value of the annuity will be excluded when calculating required minimum distributions (RMD) from other retirement accounts (and the payments from the QLAC are assumed to satisfy its RMD obligation).

To be eligible, a QLAC must meet the following criteria: i) Investment in the contract is limited to the lesser of 25% of all pre-tax retirement account balances aggregated together, or $125,000 (indexed for inflation); ii) The QLAC must begin its pay outs no later than age 85; iii) The QLAC must be irrevocable and illiquid (no cash-surrender value), but it can provide for a return-of-premium death benefit payable to heirs as a lump sum or life-contingent survivor annuity; and iv) it must be a fixed income annuity – variable annuities, indexed annuities, and similar type annuities will not qualify.

4. IRS Notice 2014-54 allows for the tax-free conversion of after-tax funds from a 401(k) account to a Roth IRA.

Under this IRS Notice, the IRS confirms that individuals with both pre and after-tax money in an employer sponsored retirement plan can convert the after-tax money to a Roth IRA tax free. However, one may not simply take out the after-tax money for the Roth conversion and leave only pre-tax money behind in the employer plan. If they do, the IRS will apply the traditional pro-rata rules to the distribution.

The rules governing IRAs and other retirement accounts are very complex and tricky. Even seemingly simple transactions involving an IRA or other retirement account can result in disastrous tax consequences. And the Internal Revenue Code is extremely unforgiving. Before making any move with any type of retirement account, consult your CPA or other tax adviser, or contact me. I can help.

New Once-Per-Year Rule On IRA Rollovers Looms

Beginning January 1, 2015, IRA owners will be limited to one IRA rollover per year under a new Internal Revenue Service rule. The IRS issued the rule in response to a recent US Tax Court decision which held that multiple rollovers between different IRAs owned by the same taxpayer violated the Internal Revenue Code. The new rule will be applied prospectively and will impact taxpayers owning more than one traditional IRA or Roth IRA.

Under the new IRS rule, an individual receiving an IRA distribution on or after January 1, 2015, cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA (whether a traditional IRA or Roth IRA) in the preceding 1-year period that was rolled over into an IRA. The new aggregation rule, which takes into account all distributions and rollovers among an individual’s traditional and Roth IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014. This creates a special transitional safe harbor for those taxpayers who received a distribution from an IRA in 2014 and properly rolled it over into another IRA. Such a rollover will be disregarded for purposes of whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution.  This gives IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.

A conversion from a traditional IRA to a Roth IRA is not subject to the aggregation rule, and such a rollover is disregarded in applying the one rollover per year limitation to other rollovers. Note, however, that a rollover between an individual’s Roth IRAs would preclude a separate rollover within the 1-year period between the individual’s traditional IRAs, and vice versa.

The one-per-year rollover limitation does not apply to a rollover to or from a qualified plan [such as a 401(k) or 403(b)] (and such a rollover is disregarded in applying the one-per-year rollover limitation to other rollovers). More importantly, it does not apply to direct trustee-to-trustee transfers.

This rule will certainly encourage taxpayers to make direct trustee-to-trustee transfers when moving money between IRA accounts.  Trustee-to-trustee transfers expressly avoid the new rollover aggregation rule.

The rules governing distributions from IRAs and other retirement accounts are very complex, and very tricky. Even seemingly simple transactions involving an IRA or other retirement account can result in disastrous tax consequences. And the Internal Revenue Code is extremely unforgiving. Consult your CPA or other tax adviser, or give me a call. I can help.

December 31 Deadline Approaches For Mandatory Distributions From IRAs.

The December 31 deadline for taking required minimum distributions (RMDs) from individual retirement accounts is approaching.  One either takes the mandatory RMD from their IRA by year end or suffers the 50% excess accumulations penalty (plus interest!) on any required withdrawals that aren’t taken.

Generally, an IRA owner who is at least age 70½ must take an RMD from an IRA by December 31, 2014, with one exception. If the IRA owner happened to reach age 70½ in 2014, he can delay taking the 2014 RMD until April 1, 2015. But remember, if the distribution is delayed to next year, the IRA owner will have to take two distributions in 2015. (For those with substantial taxable income, delaying the 2014 distribution may have a significant impact on their income taxes for 2015, so proper planning is a must.)

So, who has to take an RMD from an IRA before year end? Let’s take a look at some of the more common situations:

If the owner of a traditional IRA is at least age 70½ by December 31, he must take a distribution. (But, if he did reach age 70½ this year, he can delay taking this year’s RMD until April 1, 2015.) (Roth IRA owners do not have to take RMDs – a prime benefit of a Roth IRA.)

For a non-spouse beneficiary of a traditional IRA, an RMD must be taken by year end – regardless of her age – if the account owner died before 2014.

For the surviving spouse who is the sole beneficiary of a traditional IRA, an RMD must be taken in 2014 if the deceased account owner would have reached age 70½ this year. If the account owner died in 2014 and he was age 70½ or older, the spouse beneficiary will have to take an RMD in 2015, the year after the account owner’s death.

If a taxpayer is under age 59½ and has set up a §72(t) distribution plan (“Series of Substantially Equal Periodic Payments”) from her IRA, she must take her full distribution by year end.

If an IRA owner died after April 1, 2014, and he was at least age 70½ at the time of death, he will have an RMD for 2014. The RMD must be taken by the account beneficiary if a beneficiary was designated. If no beneficiary was designated, the RMD is payable to the IRA owner’s estate.

We have focused only on traditional IRA accounts in this post. Special rules apply with regard to RMDs from multiple IRA accounts, and RMDs from other types of retirement accounts such as 401(k) and 403(b) accounts, which simply cannot be addressed here in a single post.

The rules governing required minimum distributions from IRAs and other retirement accounts are many, complex, and tricky.  If you are not sure whether you must take an RMD from an IRA or other type of retirement account this year, or how much to take out if you do, please consult with your tax advisor, or give me a call. I can help.