By Chris L. Meacham, CPA,
There have been two recent court rulings that have narrowed some IRA planning opportunities. All IRA owners will want to be aware of and understand these new rules before planning their estate or transferring money between IRAs.
Rule 1: Once-per-year transfers
The first rule came out of tax court and limits IRA owners to one 60-day rollover between accounts in a 12-month period across all of their IRAs. This rule will go into effect January 1, 2015.
With the 60-day rollover, a check is cut to the account owner with the promise that the funds will be returned to an IRA within 60 days or those funds will be subject to taxes and penalties. Before this recent ruling, one transfer could be done in a 12-month period for
The conclusion of one family’s court case, however, has changed that rule for everyone. Now all IRA owners are limited to doing just
of these 60-day transfers annually regardless of how many IRAs they own. And to be clear, the “once a year” limitation is not the calendar year but a fiscal year: a full 12 months or 365 day from when you do the roll-over.
Roth IRAs, however, count separately under this rule and are subject to the same once a year allotment. Therefore, you are allowed to do one IRA-to-IRA rollover per year as well as one Roth IRA-to-Roth IRA rollover per year.
One final note on this new rule, it is important to point out that the rule does not apply to trustee-to-trustee transfers. These transfers are done between brokerages and checks are made out to the brokerage or bank for benefit of the client’s account. “You can do those all day long,” says author and IRA expert Ed Slott, CPA. “You can do 15 a day if you wanted.”
Rule 2: Inherited IRAs
This second rule involves a Supreme Court decision that states that inherited IRAs are
retirement accounts. This means that inherited IRAs are treated like all other inherited assets and are therefore open to creditors.
Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the status of inherited IRAs with regard to creditors has been foggy at best. In general, owners of workplace retirement plans enjoy federal protection from creditors, and states determine if a person’s IRA is creditor-protected. But it was never clearly spelled out if inherited IRAs counted as retirement plans. This year, however, the Supreme Court finally made a ruling on this and stated that they are not retirement plans.
There are ways, however, to protect heirs from themselves. For example, an individual can leave the IRA to a trust rather than an individual. But leaving an IRA to a trust can be quite complicated, and the trust must have the proper language or the heirs will encounter immediate income tax consequences. Another option would be to take the money out of the IRA and buy life insurance. That way, heirs will end up with tax-free money with no distribution rules attached, and the money would be creditor-protected.
The one exception to this new rule, however, is the spousal rollover. When a spouse inherits an IRA, they can take the account and use it as their own retirement account. And if these spousal rollovers are challenged by creditors, the law seems to favor spouses.
Part of being smart with your investment and retirement accounts is staying up to speed on all new and changing laws. Although these laws seem to complicate things further, hopefully with this knowledge, you can stay one step ahead and ensure that all your wealth management decisions are well informed.