1. 60-day rollover rules:
In a monumental court case last year, the Tax Court ruled that an individual can only do ONE 60-day rollover in a 12-month period, regardless of how many IRAs they have. For this purpose, traditional, SEP, SIMPLE, and Roth IRAs will be aggregated. This rule will apply to IRA-to-IRA rollovers and Roth IRA-to-Roth IRA rollovers only. Roth conversions and 60-day rollovers to and from employer plans (i.e. Solo 401(k) plans) do not count. However, there is a transition rule for 2015 that ignores some 2014 IRA distributions.
2. Inherited IRAs are not protected in bankruptcy:
In another important case, the U.S. Supreme Court ruled that IRAs inherited by a non-spouse beneficiary do not have federal protection in bankruptcy court. It all came down to defining a “retirement account.” The Supreme Court found that an inherited IRA should not be considered a retirement account because inheritors have required distributions beginning in the year after death – no matter the age of the non-spouse beneficiary, there is no early distribution penalty, and the beneficiary cannot make contributions to the account. An inherited IRA will have whatever bankruptcy protection is available under state law.
3. The rollover of after-tax employer plan funds to a Roth IRA:
IRS announced a shift in their thinking on the rollover of after-tax plan funds. They reiterated that an employer plan distribution (i.e. from a 401(k)) is generally a pro-rata distribution when there are after-tax funds in the plan. A distribution will contain both pre-tax and after-tax funds. However, after-tax funds can now be allocated to a Roth IRA when the distribution from the plan is going to different destinations. For example, someone who takes a distribution of $110,000, which is $90,000 pre-tax and $20,000 after-tax, most likely wants to send the $90,000 in a direct rollover to an IRA and the $20,000 to a Roth IRA. Most plans will do only one direct rollover so the $20,000 will generally go to the participant, who would then have 60 days to roll it over (convert it) to the Roth IRA. This $20,000 conversion would be income tax free.
4. QLACs (qualifying longevity annuity contracts):
In 2012, IRS announced the creation of QLACs. It took until 2014 to announce the final regulations, and companies are now beginning to offer these annuities. The name has changed slightly; they are now qualifying longevity annuity contracts. An individual can invest up to $125,000 or 25% of their IRA balances in these annuities. Required distributions are deferred until age 85. They are intended to be simple annuities that cannot lose money and guarantee income in an individual’s later years. These are not equity indexed or variable annuities. Beneficiary options are more restrictive and the purchase is irrevocable so make sure this product fits you or your client’s retirement needs.
5. Tax reporting of hard-to-value assets:
IRS is now collecting information on hard-to-value assets in IRAs. This would include assets such as real estate, limited partnerships, and non-publicly traded stocks. The concern of IRS is that an individual pays the right amount of tax on these assets when they are converted to Roth IRAs or when they are distributed in kind to the IRA owner. IRS already required IRA custodians to have accurate valuations of these assets, but with the new reporting requirements, custodians will now have to make more of an effort to comply. Assets distributed from an IRA will have a special code (code K) on Form 1099-R and assets converted to a Roth IRA will have special coding on Form 5498.