Two 2014 court decisions you need to know about
In this installment of our 8 Wealth Issues blog, I thought it important to focus on two recent court decisions that clients need to understand as they will effect your retirement nest egg. These include a ruling on the tax treatment of rollovers & the asset protection of inherited IRAs.One Indirect IRA Rollover per Year
What was once allowed is now prohibited. In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.1
Starting in 2015, you are allowed one IRA-to-IRA rollover per 365 days - period. A subtle but important change has been made. Publication 590 has long stated that a taxpayer can generally only make one tax-free rollover of any part of a distribution from a single IRA to another IRA during a 12-month period. That didn’t preclude a taxpayer from making multiple IRA-to-IRA rollovers using multiple IRAs during such a timeframe.1,4 So beginning next year, you can only make a tax-free IRA-to-IRA rollover if you haven’t made one within the past 365 days.3
Don’t grumble just yet. If you want to move money between IRAs more than once next year, there is still a way you can do it. The new IRS rule change doesn’t apply to every type of IRA “rollover.” Here’s the good news. IRS Announcement 2014-15 states: “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).”3
In other words ... the new restriction does not apply to trustee-to-trustee transfers.
Inherited IRAs are not protected from bankruptcy
The other court case that was recently decided involved inherited retirement assets. In the case of Clark v. Rameker, the Supreme Court decided unanimously on June 12 against Heidi Heffron-Clark and her husband Brandon C. Clark, finding that an IRA Ms. Clark inherited directly from her deceased mother in 2000 isn't eligible for protection from creditors. The couple had filed for Chapter 7 bankruptcy back in 2010, and at that time identified the inherited IRA — then valued at $300,000 — as exempt from the bankruptcy estate.
The court's decision was unanimous, and held that Inherited IRAs differ from traditional IRAs in 3 ways:
1. Holders of inherited IRAs cannot invest additional money into the account, whereas those with traditional and Roth IRAs can do so.
2. The tax code requires inherited IRA holders to withdraw the money from the account, either taking all of the money in the IRA within five years after the death of the owner or taking minimum annual distributions each year.
3. Inherited IRA holders may also take all of the money out at any time and for any purpose without penalty. Roth and traditional IRA holders, meanwhile, are subject to a 10% penalty for withdrawals before age 59.5.
Those three characteristics led the court “to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement,”5
Conclusions
In light of these two court decisions, people should be reminded of two things. Planning needs constant review in light of decisions in Washington that affect the assumptions we make in financial plans. Reviewing the uses & purposes of different accounts and their application to your financial life is vitally important. The other consideration people should make is in regard to making IRA rollover and transfer decisions. Be sure you understand the tax ramifications as you make these requests and work with a professional who can ensure that your deferred savings stays deferred.
This information has been derived from sources believed to be accurate This article is for informational purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that we are not engaged in rendering legal or tax advice through this article. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. IRS Circular 230 Disclosure: Any discussion pertaining to taxes in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.
Citations.
1 - wealthmanagement.com/retirement-planning/seeing-double [2/4/14]
2 - marketwatch.com/story/new-ira-rollover-rule-coming-in-2015-2014-04-04 [4/4/14]
3 - irs.gov/pub/irs-drop/a-14-15.pdf [4/16/14]
4 - tinyurl.com/lnd86vs [4/24/14] 5 – investmentnews.com/article/20140623/FREE/140629977# [6/23/14]
