Employee Benefits Client Alert: New Guidance on IRAs
One Tax-Free Rollover Per Year According to a recent United States Tax Court ruling, an individual can complete only one rollover of a tax-deferred Individual Retirement Account (“IRA”) per year pursuant to Internal Revenue Code Section 408(d)(3) even if the individual has several IRAs. Code Section 408(d)(3) allows a taxpayer who receives a distribution from an IRA to defer federal income tax on that distribution if within 60 days after receipt the taxpayer rolls over the distribution to another IRA. In Bobrow v. Commissioner, the United States Tax Court ruled that an individual could not roll over a distribution from one IRA to another IRA if the individual had made such a rollover involving any of the individual’s IRAs in the preceding one-year period. The Internal Revenue Service (“IRS”) had taken the position that when an individual had several IRAs, the one-IRA-rollover-per-year limitation applied separately to each IRA. However, following the Tax Court’s decision in Bobrow, the IRS issued an announcement confirming that the once a year restriction applies on a per taxpayer basis (and not a per IRA basis). Note that the Tax Court ruling and the change in the IRS position does not impact direct transfers of assets from IRA to IRA (so-called “direct rollovers”) because such direct transfers are not considered distributions that would be subject to the once-a-year rollover restrictions of Code Section 408(d)(3).
Inherited IRAs Not Protected in Bankruptcy In a recent landmark decision, the United States Supreme Court ruled unanimously, 9-0, that inherited IRAs are not protected from creditors in bankruptcy under federal law. Under the Bankruptcy Code, “retirement funds” are protected from the reach of creditors and may generally be kept by the owner following bankruptcy. However, in Clark v. Rameker Trustee, the Supreme Court held that inherited IRAs do not constitute “retirement funds” for this purpose and, as a result, are not exempt from the bankruptcy estate. Note that the Supreme Court’s holding in Clark applies only for purposes of the federal bankruptcy exemption, and may not apply to debtors in all states. Some states have opted out of the federal bankruptcy statutes and have exempted inherited IRAs from creditors.
Final Rules Allow Use of Longevity Annuities by IRAs (and 401(k) Plans) The U.S. Department of Treasury and the IRS recently issued final rules allowing IRAs to provide for qualifying longevity annuities without violating the required minimum distribution (RMD) rules. The RMD rules provide that the “required beginning date” for an employee to begin receiving distributions from a qualified plan (other than a 5-percent owner) is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70-1/2, or retires from employment with the employer maintaining the plan. The RMD rules apply to IRAs as well as 401(k) plans. The final regulations allow up to 25% of an IRA (or 401(k) plan) account balance (or, if less, $125,000, adjusted for cost-of-living) to provide deferred longevity annuity payments that begin at an advanced age without violating these RMD rules.