Financial Institutions Complex IRA Issues

Transcription

1 Financial Institutions Complex IRA Issues October 1, 2015 Iowa Trust Conference Iowa Bankers Association Des Moines, IA Michael Nelson JM Consultants 6930 Glory Road Baxter, MN 56425

2 6930 Glory Road Baxter, MN Copyright October 1, 2015 ALL RIGHTS RESERVED Baxter, MN 56425

3 INTRODUCTION JM Consultants Mission Statement is to provide the best possible IRA products and services at the most reasonable prices. The purpose of this manual is to provide the most up-to-date and comprehensive IRA information possible. The material in this manual is believed to be the most up-to-date available as of the revision date. However, IRA rules, regulations, and procedures change often. Consequently the accuracy of this manual cannot be guaranteed. If you have any questions about anything in this manual, please do not hesitate to contact JM Consultants at or call Please Note: JM Consultants does NOT provide legal, accounting, investment, or tax advice. In important matters like this you must always rely on your own legal, accounting, investment, and/or tax professional before finalizing any decision.

4 Table of Contents Section 1:Transfers/Rollovers/QP Rollovers Section 2:Beneficiaries Section 3:Year of Death Reporting and Year After Death Section 4: Proposed Legislation i October 2015

5 ii October 2015

6 SECTION 1 Transfers/Rollovers/QP Rollovers Transfers/Rollovers/ QP Rollovers IRA Transfers IRA Rollovers Note: New Court Rollover Ruling QP Direct vs Indirect Rollovers October 2015

7 Transfers/Rollovers/QP Rollovers October 2015

8 Transfers Transfers/Rollovers/QP Rollovers General Transfer Rules An IRA Holder may transfer IRA assets for any reason and generally, all other things being equal, an IRA-to- IRA transfer is typically the best way for customers to move assets from one IRA to another. 1. The check/draft must be made out to the receiving financial organization, not the IRA Holder. 2. Transfers are not taxable, and therefore, not subject to withholding requirements, 3. Transfers are not reported by the financial organization to the IRS, and therefore, the IRA Holder does not have to report them when they file their taxes, 4. There is no limit on how many transfers may be made from the same IRA, 5. There is no limit on the number of times the same IRA assets may be transferred, 6. Transfers are not limited in terms of how quickly the assets must be redeposited in the receiving IRA (e.g., there is no 60-day rule for transfers). 7. RMDs may be transferred from one Traditional IRA to another Traditional IRA; however, the RMD still must be satisfied by the original deadline if such a transfer occurs. In order for an IRA-to- IRA transfer to be eligible for this special treatment, it must be accomplished trustee-to-trustee (or custodian-to-custodian, as the case may be). Although transfers are often accomplished electronically through wire transactions, it is also possible to draft a transfer check/draft to the financial organization receiving the transferred assets. In order to be treated as a transfer rather than a rollover, transfer check/drafts must be titled in the following or similar way: Example: ABC Bank as Custodian FBO of John Doe s (Traditional or Roth or SEP or SIMPLE) IRA As long as a transfer check/draft is properly titled, it shouldn t matter whether the check/draft is mailed directly to the receiving financial organization or the IRA Holder hand delivers it to the receiving financial organization. Proper titling ensures the check/draft is only negotiable by the trustee, and therefore is considered a trustee-totrustee transfer no matter what means is used to get the transfer check/draft from the sending to the receiving financial organization. However, since it can not be guaranteed that all financial institutions will handle these transactions correctly, we recommend that the financial organization NOT give the transfer check/draft to the IRA Holder. This will avoid problems like incorrect cashing, depositing into the wrong IRA, depositing it into a non-ira account, lost checks/drafts, and other errors. IRS Revenue Ruling , from 1978 clearly states that for the transaction to be a transfer it must be directly from one IRA trustee to another IRA trustee. Therefore if something goes astray, the IRS could find fault with the IRA Custodian/Trustee October 2015

9 Transfers/Rollovers/QP Rollovers In cases where the titling of a check/draft for deposit into an IRA is unclear as to intent, it is important to contact the sending financial institution to find out whether they intended the check/draft to be sent as a rollover or as a transfer so that the reporting (or nonreporting) is appropriate at both the sending and receiving financial institution. Organizations May Refuse to Directly Transfer Assets If Plan Document Does Not Establish a Contractual Obligation to Transfer Whether a financial organization must directly transfer assets upon request by the IRA Holder is a matter of contract law, not tax law. Therefore, if the plan document allows a financial organization to reserve the right not to transfer assets, they are not legally obligated to do so. Of course, not offering direct transfers could ultimately put a financial organization at a competitive disadvantage even if it is not legally obligated to do so. Non-cash assets can also be transferred. It is called a Transfer In-Kind. The same basic procedures and documentation should be completed, but in this case the title/registration of the assets are changed to the new IRA Custodian/trustee. Of course, the new custodian/trustee must be able to accept such non-cash assets. Special Transfer Situations Now that you understand the basic advantages of using a transfer to move IRA assets from one IRA to another, it s important that you be aware of four special transfer situations that have unique operational considerations, all of which will be discussed in more detail below. These include asset transfers that occur: 1. When an IRA Holder is age 70 1 /2 or older, 2. Due to divorce, 3. Due to death (treat as own or inherited IRAs) 4. As a result of a one-time transfer to a Health Savings Account 1. Transfers of Traditional IRA Assets Subject to the RMD Rules In the past, if a Traditional IRA Holder who was age 70 1 /2 or older had not taken his annual RMD for the year, the trustee or custodian either had to distribute the RMD amount or withhold the RMD amount before transferring the IRA. However, the final RMD regulations that were issued in 2002 no longer require a financial organization that is transferring a Traditional IRA subject to RMDs to distribute or retain the RMD because IRA Holders may aggregate their RMDs and take them from any of Traditional IRA they own. Note: However, in cases where an amount is transferred out of an IRA before December 31 of a year, and not received by a receiving financial organization until the following year, the receiving organization needs to adjust its December 31 reporting for the individual s IRA to include the amount of the transfer for the purpose of calculating the next year s RMD October 2015

10 Transfers/Rollovers/QP Rollovers Customer Service Tip Even though customers do not have to take their RMD before transferring assets from one Traditional IRA to another, financial organizations involved in a transfer of Traditional IRA assets that are subject to the RMD requirements should ask the IRA Holder whether he or she would like to take the distribution before the transfer to avoid the possibility of forgetting to take it before December 31 and thereby incurring a 50% penalty on the undistributed RMD. Although it is not required that either the sending nor the receiving financial institution monitor the customer s RMDs, asking this question will give customers the feeling that your financial organization is concerned with their best interest, which can play an important role in customer retention and winning back customers after they ve left for another financial organization. Since transfers are not reported as distributions, the RMD is allowed to be transferred. But remember, RMDs can NOT be distributed and rolled over. 2. Transfers Due to Divorce A divorce decree or legal separation agreement should provide the information necessary to properly transfer IRA assets from an IRA Holder to his or her former spouse or legally separated spouse. Information that is generally necessary to properly transfer IRA assets to a former spouse includes: How the assets should be divided (e.g., pro rata, a specified percentage, a particular asset held by the IRA, or a specific dollar amount). The date the decree was effective, particularly if the decree called for a pro rata division of the assets, since distributions to the IRA Holder would have to be taken into consideration to determine the proper amount to be transferred. Whether assets are to be liquidated for the purpose of the transfer or if they are to be transferred in kind. Whether assets are to be distributed or transferred to the former spouse. When a divorce decree orders an IRA or a portion of an IRA to be transferred to an ex-spouse, there are two ways the transfer may be accomplished: Retitling the IRA in the name of the ex-spouse and changing all information on the reporting system to reflect the change in ownership (this can be risky from a reporting standpoint if not properly executed not recommended). Transferring the assets to the ex-spouse s existing, or newly opened IRA (the best way!). Please note that there may be cases where a divorce decree does not provide enough information to transfer assets to an ex-spouse. In such a case, you may need to refer the decree back to the courts for clarification, or, depending on the nature of the problem, request that the IRA Holder and/or the ex-spouse sign a hold harmless agreement, which states that the financial organization is not responsible for any adverse tax consequences associated with the transfer. In either case, be sure to review with your legal counsel before doing anything October 2015

11 Transfers/Rollovers/QP Rollovers If the financial institution can use the transfer method of moving the money and then a distribution has to be paid out, the check/draft and reporting would be reported under the ex-spouse (the recipient) of the money using code 1 (under 59 1 /2) or code 7 (over 59 1 /2). This would be according to IRC Sec 408(d)(6). (For Roth IRAs the distribution codes could be J, Q or T.) If however the court order states that a check/draft must be made payable to the ex-spouse directly from the IRA Holder s IRA, the 1099-R must be made in the name and SSN of the IRA Holder, not the recipient ex-spouse. The IRA Holder would also be responsible for any taxes due on that distribution. In addition, that distribution would NOT be eligible for rollover by the ex-spouse to the ex-spouse s own IRA. Qualified Plans Handle Division of Assets Differently than IRAs in Divorce and Separation Cases Qualified retirement plans are neither permitted nor required to follow the terms of domestic relations orders purporting to assign retirement benefits unless they are qualified domestic relations orders (QDROs). A state authority, generally, though not always, a court, must issue a judgment, order, or decree or otherwise formally approve a property settlement agreement before it can be a domestic relations order under ERISA. Although the alternate payee in a QDRO is generally a spouse or ex-spouse, it may also be a child or other dependent of the plan participant. In order for an order to qualify as a QDRO under ERISA it must contain the following information: The name and last known mailing address of the participant and each alternate payee The name of each plan to which the order applies The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee The number of payments or time period to which the order applies In addition, there are certain provisions that a QDRO must not contain: The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value) The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse A QDRO may be included in a divorce decree or done as a separate document as long as it contains all the pertinent information to be a QDRO and does not contain any provisions that are contrary to a QDRO October 2015

12 Transfers/Rollovers/QP Rollovers The administrator of the retirement plan affected by an order is the individual (or entity) initially responsible for determining whether a domestic relations order is a QDRO and they must establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders. Administrators are required to follow the plan s procedures for making QDRO determinations. Administrators also are required to furnish notice to participants and alternate payees of the receipt of a domestic relations order and to furnish a copy of the plan s procedures for determining the qualified status of such orders. If a QDRO is legally challenged, the proper jurisdiction for such a challenge is federal, not state court. The plan administrator should be named in the governing plan document, but is generally a representative of the employer offering the plan. Note: Assets moved from a QRP into an ex-spouse s IRA are considered and reported as a Direct Rollover, NOT a transfer. Note: There may be an advantage to leaving assets in the qualified plan for an ex-spouse who is under 59 1 /2 because distributions from a qualified retirement plan that are due to a divorce or separation agreement are not subject to the 10% early distribution penalty. Unless the plan document or the QDRO does not allow for this in a particular situation, customers under 59 1 /2 who need to access the assets they receive pursuant to a divorce decree should often leave the assets in the qualified plan to avoid the 10% penalty. Any funds transferred within the QRP must be properly titled in the name of the ex-spouse receiving the QRP assets, titled separately from those of the former owner of the QRP assets. QRP and IRA Owners should always rely on their own legal and tax advice in these important matters. Also, unlike IRAs, a distribution from a qualified plan pursuant to a QDRO is an exception to the 10 percent early distribution penalty. QDRO rules do NOT apply to IRAs. 3. Transferring Due to Death Whenever an IRA Holder dies, the ownership of his or her IRA assets must be transferred to the beneficiary for future reporting purposes. This process always involves retitling the IRA in a way that clearly reflects the IRA is inherited and should be accomplished through a non-reportable transfer transaction. If the assets are staying at the same financial institution, it is not necessary to have the beneficiary sign a new IRA document, although most financial organizations prefer to have beneficiaries do so as they have Inherited IRA Plan Agreements, which establish a clear, written, contractual agreement between the financial organization and the IRA beneficiary. (Recommended) However, if the assets are being transferred to another financial organization, a beneficiary should sign a new document as beneficiary of the inherited IRA and the transfer cannot alter the minimum distribution requirements that are applicable to the inherited IRA assets (see Chapter 9, Death Distributions, for more details) October 2015

13 Transfers/Rollovers/QP Rollovers In summary, when we discuss Transfer Due to Death, we are referring to two situations. 1) Moving the IRA assets from the deceased IRA Holder IRA to the beneficiary s Inherited IRA. 2) Moving the IRA assets from the deceased IRA Holder s IRA to a qualifying spouse beneficiary s own IRA. In both cases the transaction is a non-reportable transfer. Special Note: In addition, Inherited IRAs can be transferred to another Inherited IRA of the same type for the same decedent. This is NOT a Transfer Due to Death. It is just a plain, non-reportable, Inherited IRA-to-Inherited IRA, transfer. Spouse Beneficiaries vs. Non-Spouse Beneficiaries Important Special Note: The only way a nonspouse beneficiary may move an Inherited IRA is through a trustee-to-trustee transfer, because they are not eligible to roll over Inherited IRA amounts. Spouse beneficiaries, however, may either roll over or transfer an inherited IRA. However, if a spouse beneficiary rolls over inherited IRA assets, they may no longer be treated as inherited IRA assets, but rather, must be treated as if they are the surviving spouse s own IRA assets. Therefore, if a spouse beneficiary wants to move inherited IRA assets to another financial organization without losing their beneficiary status, they must move them through a transfer rather than a rollover. Deemed Transfers Associated with Spouse Beneficiaries When a spouse inherits his or her spouse s IRA, he or she becomes subject to required minimum distributions as a beneficiary of the IRA (please note, however, the RMD rules for a sole spouse beneficiary are different than those for nonspouse, see Chapter 9, Death Distributions, for more details). If a spouse beneficiary fails to take a beneficiary RMD, or deposits a contribution in an inherited IRA, the spouse is treated as if he or she were treating the IRA as his or her own. In such cases, the account should be retitled in the surviving spouse s name as if it were his or her own IRA. The basis for this rule may be found in the RMD regulations October 2015

14 Transfers/Rollovers/QP Rollovers General Rollover Rules An IRA Holder may roll over IRA assets for any reason. However, they are much more limited than transfers in terms of how often assets may be moved and how quickly they must be moved once they are distributed in order to avoid taxation on the assets. In general, with rollovers: 1. The check/draft is made out to the IRA Holder not the organization that will ultimately receive the rollover. This is sometimes referred to as the IRA Holder receiving constructive receipt of the assets, because they are free to do with them what they want during the period they hold the assets. 2. May be taxable if assets are not rolled over within 60 days of receipt, and therefore, are subject to withholding requirements (although an IRA Holder will generally waive withholding by completing a withholding certificate if they intend to roll the assets over), NOTE: The IRA Holder, if eligible, can rollover any amount up to the amount of the distribution. The IRA Holder is NOT required to rollover the entire amount of the distribution. Any amount NOT rolled over will be subject to the usual IRS taxes and penalties. 3. Rollovers are reported to the IRS by the financial organization that cuts the distribution check/draft as a distribution (Code 7 or Code 1 on a 1099-R Box 7 for a, Traditional IRA, depending on the age of the IRA Holder. Code J,T,Q on a 1099-R in Box 7 for Roth IRAs), and by the financial organization receiving the assets as a rollover contribution in Box 2 of the IRA Holders will have to report the rollover when they file their taxes, 4. Rollovers are limited to one rollover per twelve month period (365/366 days) for the same IRA assets, 5. Rollovers are limited to one eligible rollover distribution per twelve month period (365/366 days) from the same IRA (Through December 31, 2014), 6. EFFECTIVE JANUARY 1, 2015, only one IRA rollover is allowed per person, per year, regardless of how many IRAs the individual has. That means only one IRA 2015 distribution can be correctly rolled over. 7. Rollovers must be rolled over within 60 days of receipt, 8. RMDs cannot be rolled over, can only be transferred, 9. Rollovers must be documented with an irrevocable rollover designation. Per the IRS, once a rollover is designated by the IRA Holder/Taxpayer, the election is irrevocable and cannot be changed for his or her tax purposes. A rollover is a tax-free reinvestment of a distribution from one IRA into another IRA of the same type (SIMPLE IRA (after 2 years) to Traditional IRA rollovers are the only exception to this general rule). Unlike transfers, where assets move directly from one trustee to another, and an IRA Holder does not have access to the funds being transferred, with a roll over, an IRA Holder usually has control over the IRA funds after they are distributed October 2015

15 Transfers/Rollovers/QP Rollovers Because IRA Holders have access to IRA assets during the IRA rollover process, in order to prevent potential self-dealing abuses involving rollovers, Congress imposed two important restrictions on most IRA rollovers: the one rollover per 1-year rule, and the 60-day rule. Each of these rules is explained in more detail below: One Rollover per IRA per 12-Month Rule (Through December 31, 2014) OLD RULE! You cannot roll over more than one distribution from an IRA within a 12-month (1-year period), nor can you roll over the same assets more than once in a 1-year period. That means 365/366 days, not calendar year or tax year. Example #1: If an IRA Holder takes one distribution from IRA #1 on January 1, and one distribution from IRA #1 on February 1, he may roll over only one of those distributions to another IRA (only one distribution from an IRA may be rolled within a 1-year period). Example #2: If an IRA Holder takes a distribution from IRA #1 on May 1, 2014 and rolls it to IRA #3 within 60 days, and then takes a distribution from IRA #2 on November 1, 2014 and rolls it to IRA #3 within 60 days, the IRA Holder may roll over the amount in IRA #3 attributable to the amount that was rolled from IRA #1 as early as May 2, However, if the IRA Holder does this, the amounts rolled over from IRA #2 will not be eligible to be rolled over until May 3, Example #3: If an IRA Holder takes a distribution from IRA #1 on November 1, 2014, and rolls it over within 60 days, to IRA #2, the IRA Holder can not take another distribution from IRA #1 and roll it over until November 1, In addition, the assets rolled over from IRA #1, now in IRA #2 can not be distributed and rolled over until the one year period has also passed. Note: 60 Days starts on the date of distribution. 1 per 12 months starts counting on the date of distribution, not the date of the rollover. Distributing IRA not Receiving IRA: Note that the IRA Holder could do two rollovers in 2014, because he had two IRAs, but only one rollover if he had only one IRA. However, the limit on one rollover per IRA per twelve months applies to the distributing IRA, not the receiving IRA. So, for example, if a person took a $5,000 distribution from IRA #1 and rolled over $2,000 to IRA #2 after 30 days, and $3,000 to IRA #2 before the end of the 60-day rollover period, this would not violate the one rollover per IRA per year rule because although there were two rollover deposits, there was only one (rollover) distribution involved. If a second (rollover) distribution is received within the twelve months, the second rollover is considered a regular IRA contribution subject to all usual limits. Excess contribution rules also apply. If discovered in the same calendar year: The IRA custodian/trustee must correct its records to show the second rollover amount as a regular IRA contribution, Traditional or Roth. Contribution documentation should be obtained from the IRA Holder, correcting the rollover documentation. If the IRA Holder is eligible for that amount it remains an IRA contribution for that year. If the IRA Holder is either not eligible for that amount or it is for an amount over the annual statutory limit it must be corrected as any other excess contribution. Even if cor October 2015

16 Transfers/Rollovers/QP Rollovers rected in the same year, the full amount must be shown as the amount received as a contribution. The amount will then be reported on that year s Form 5498 as a contribution and any correction will be reported on Form 1099-R. If discovered in a different calendar year: The original Form 5498 must be corrected showing zero for the second rollover amount previously reported and that amount must be reported on that Form 5498 as a regular contribution, Traditional or Roth. If the IRA Holder is eligible for that amount it remains an IRA contribution for that year. If the IRA Holder is either not eligible for that amount or it is for an amount over the annual statutory limit it must be corrected as any other excess contribution, reported on Form 1099-R. Exception to One-per-Year Rollover Rule for Failed Financial Institutions If IRA assets are distributed from a failed financial institution in receivership by the FDIC/NCUA due to the insolvency of the financial institution and the inability of the FDIC/NCUA to find a buyer for it, the one rollover per year rule does not apply to these assets as long as the distribution is not initiated by the IRA Holder or the IRA Custodian/Trustee, but by the FDIC/NCUA. *****IMPORTANT CHANGE***** NEW RULE! Effective January 1, 2015, the one-per-year rule is drastically changed. A US Tax Court decision caused this change. The IRS will be enforcing, so you can believe they will be checking, a one-per-year-per IRA rule. So it will make no difference how many IRAs the IRA Holder has, or how many different IRA Custodians/Trustees they use, the IRA Holder will be limited to one IRA rollover per year. PERIOD! The recent decision in US Tax Court, Bobrow vs. Commissioner, seems to change the availability of having one IRA rollover per year, PER IRA, INSTEAD limiting it to one IRA rollover PER PERSON, PER YEAR...period! The confusion comes from the Internal Revenue Code (IRC) itself and the interpretation that the IRS has used for years. IRC Section 408(b)(3)(B) states the following: 408(b)(3)(B) Limitation This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph. (Emphasis added) If you note the highlighted text above, the IRC is not real clear. The Tax Court interprets this to mean a rolled over distribution from an IRA, ANY IRA, not just the same IRA, must be limited to one per year, per person October 2015

17 Transfers/Rollovers/QP Rollovers So what is the IRA Owner to do? First, whenever possible you should use an IRA Transfer, a direct transfer of IRA assets to another IRA. Discuss this with your IRA Custodian/Trustee to clarify the important differences between rollovers and transfers, because there are no limitations on the number of IRA Transfers you can use. If you must use the rollover method, discuss this with your own legal and tax counsel BEFORE doing anything. In what can be considered somewhat of a surprise, the IRS, in IRS Announcement , has stated that they will abide by the US Tax Court decision and NOT challenge the court s interpretation or seek to further clarify the Regulation. They plan on changing all of their articles, notices and publications so that it will be clear that individuals will be allowed ONLY ONE IRA ROLLOVER per year, regardless of how many IRAs they own. And that means 365/366 days, not tax year or calendar year. However, in an unusual show of understanding of problems this change will cause, they do not intend to apply this new interpretation until 2015! The Treasury intends to issue a proposed regulation that would clarify the change and provide that it would be effective for IRA distributions taken after December 31, REMEMBER: There are no limitations on how many IRA-to-IRA direct transfers you can have. BEFORE planning any rollover, it is probably a good idea to review it with your tax counsel and your IRA Custodian/Trustee to see if the Direct Transfer method may not be a better avenue to pursue. However, Direct Transfers must be administered correctly. IMPORTANT: This new rule interpretation DOES NOT apply to Qualified Retirement Plan (QRP)-to-IRA rollovers. So for your QRPs, like 401(k)s, you are still able to have as many QRP-to-IRA rollovers as you want. QRP-to-QRP rollovers are also NOT affected. (Direct (Chapter 5) or Indirect (Chapter 6) Rollovers, QRP-to- Traditional IRA) The U.S. Tax Court recently refused to review their decision that a taxpayer can only make one nontaxable rollover per year, NOT one-per-year-per-ira. Even though the tax court realized that was a differing opinion from what has been detailed for years in IRS Publication 590, they stuck to their decision. You will recall that the original decision was discussed in previous issues of this newsletter. It was somewhat telling that the decision also stated that taxpayers are reminded that IRS published guidance is not binding precedent, and that taxpayers rely on IRS guidance at their own peril. In other words taxpayers can NOT rely on any guidance from the IRS, verbal or published, for their tax questions. Neither the Tax Court nor the IRS indicated who or what could be relied on for official guidance and answers to those questions. It does not make any difference how the IRA Owner files his tax return, married or single. The rule applies to each individual separately. So, the IRA Owner is allowed one rollover in 2015 and his spouse is also allowed one rollover in However, the one rollover must be of that individual s own IRA October 2015

18 Transfers/Rollovers/QP Rollovers NEW IRA-TO-IRA ROLLOVER RULE FOR 2015 The IRS clarified the transition rule. Any 2014 distribution correctly rolled over within sixty days will not be considered as counting toward the 366/366 day rule forward, even if not completed until Let us explain. The IRA Owner took a distribution from IRA #1 on November 15, 2014, another distribution from IRA #2 on December 1, 2014 and another distribution from IRA #3 on December 30, Distribution #1 is correctly rolled over on January 5, Distribution #2 is rolled over on January 30, 2015 and Distribution #3 was rolled over February 15, None of those three rollovers will affect a rollover for of a 2015 distribution. Under the rules you would normally have to wait 365 days to rollover another IRA distribution. In Announcement , the IRS has stated that will not be the case for Any 2014 distribution that is correctly rolled over will not affect a 2015 distribution from being rolled over. The IRS has said that everyone is starting with a clean slate for 2015 rollovers as far as the one-year waiting period is considered. Another example: An IRA Owner took an IRA Distribution on June 1, 2014 and correctly rolled it over July 15, Normally the one-per-year rule would force the IRA Owner to wait until June 1, 2015, the date of the distribution, before he could make another rollover. Not so for This IRA Owner could take a distribution on January 2, 2015 and roll it over within sixty days. No one year wait required. IMPORTANT TO REMEMBER: With all these limitations on IRA-to-IRA rollovers, Direct Transfers from IRA-to-IRA remain unlimited! In fact, the IRS, in their Announcement encourages IRA Custodians/Trustees to remind IRA Holders of the possibility of using IRA-to-IRA Transfers instead of rollovers. And, QRP rollovers, like from 401(k)s, are also NOT Limited by this new IRA Rollover rule interpretation. NOTE: The HSA-to-HSA rollover rule remains the same which has been from the onset this more restrictive rollover rule. HSA owners are restricted to one HSA-to-HSA rollover per year, per person, the same as the NEW rollover interpretation! 60-Day Rule Assets must generally be rolled over by the 60th calendar day after a customer receives a distribution, not the date the financial organization sends the distribution check/draft or the date it is postmarked. If the rollover is received by mail, it is advisable to retain the envelope with the post mark. It is generally accepted by the IRS that mail is received 7 days after the post mark. One would need proof for additional timing. If the receipt of the mailed distribution was later than the seven days IRS default, it is the responsibility of the IRA Owner to save documentation for proof in any audit matters. The IRA Custodian/trustee should ask for and keep a copy of such proof before accepting any rollovers past the 60 days. The Internal Revenue Code does NOT allow for any extensions of the sixty day period for weekends and holidays. Only Private Letter Rulings (PLRs) have allowed for such a delay. And PLRs technically do NOT apply to October 2015

19 Transfers/Rollovers/QP Rollovers anyone but the taxpayer asking for them. One would hope that it is logical that if the 60th day falls on a weekend or holiday, the IRS would see fit to allow such an extension. However, all IRA Holders and IRA Custodians/Trustees should rely on their own legal counsel BEFORE rolling over any distribution after the 60th calendar day. If an IRA Holder would take a distribution with the intention of doing a rollover and the financial institution would impose an early withdrawal fee or a distribution fee, the net amount is the amount that can be rolled over. Example: $10,000 distribution, $50 early withdrawal fee, net distribution $9,950. $9,950 is the amount that can be rolled over. A side note, the $9,950 is what is reported on the 1099-R in box 1 as a distribution. NOTE: If the IRA Holder is out-of-town when the distribution is received it is the responsibility of the IRA Holder to maintain proof of actual constructive receipt for starting the 60-day period. The 60-day rule remains the same when the one-per-year rule changes in Exceptions to the 60-Day Rule There are currently six exceptions to the 60-day rule: 1. Disaster Relief Exceptions 2. Failed First Time Home Purchases 3. Distributions That Are Frozen Before They Are Rolled Over 4. Military Reservist Reservist Recontributions 5. Death Gratuity and Service member Group Life Insurance Rollovers 6. Repayment of Qualified Disaster Recovery Assistance Each of these exceptions is addressed in more detail below. 1. Disaster Relief The 60-day rule is often extended for rollovers of IRA distributions that are affected by natural disasters. These extensions may vary depending on the severity of the disaster, and the IRS announces new ones as necessary. They are NOT automatic. They must be formally announced by the IRS. 2. First Time Home Purchases If a person takes a distribution to pay for the qualified acquisition costs of a first-time home, and the amount is not used because of a cancellation or delay in the purchase or construction of the residence, the amount may be rolled over to an IRA within 120 days instead of the usual 60 days. (Does not count toward the one per year rule.) 3. Frozen Deposits If an amount is distributed and becomes a frozen deposit during the 60 days following the distribution because it was withdrawn for a financial institution that became bankrupt or insolvent, and the state where the bank is located is restricting withdrawals, the period during which the assets are October 2015

20 Transfers/Rollovers/QP Rollovers frozen are not counted toward the 60 day rule, nor can the 60 day period end earlier than 10 days after the assets are no longer considered frozen. 4. Military Reservist Recontributions The HEART Act, signed on June 17, 2008 by President Bush, makes permanent the right of reservists to take withdrawals from their retirement plans while on active duty, without incurring an early withdrawal penalty, regardless of their age. This applies to reservists called to active duty after September 11, 2001, and serving for 180 days or more. The reservist may also recontribute the withdrawn amounts to an IRA within two years after the end of the active duty period, without regard to the normally applicable limitations on IRA contributions. They will further need to file an amended tax return for a refund of the taxes they paid on the distribution for the year it was taken. (Does not count toward the one per year rule.) Military reservist recontributions are amounts distributed from an IRA that have exceeded the 60-day rule for rolling them back into an IRA, but which are nonetheless eligible for being recontributed under a special ROLLOVER exception. Starting in 2009 the IRA trustee or custodian reports these recontributions on Form 5498 in Box 14a with the indicator code QR in Box 14b and by the taxpayer on Form 8606 as a nondeductible contribution. The deadline for making these contributions is generally two years after the end of the active duty period and military reservist recontributions have no impact on the annual contribution limitations that would otherwise apply for the year the recontribution is made. 5. Death Gratuity and Service Member Group Life Insurance Rollovers Another provision of the HEART Act, allows military death gratuities or Service members Group Life Insurance (SGLI) payments due to the death of a military personnel to be treated as a qualified rollover contribution to a Roth IRA or a Coverdell Education Savings Account (CESA). These rollovers are limited only by the value of the death gratuity or SGLI amount and income is not considered when determining eligibility for such a rollovers. Death gratuities can be as high as $100,000, and group life insurance payments as high as $400,000 and for all payouts received after June 17, 2008; they must be deposited in a Roth IRA within one year of receipt of the payout. (Does not count toward the one per year rule.) This will represent a cost or contribution basis. This can be removed first with no tax or penalty tax. 6. Repayment of Qualified Disaster Recovery Assistance Distribution. If you choose, you generally can repay any portion of a qualified disaster recovery assistance distribution that is ineligible for tax-free rollover treatment to an eligible retirement plan, past the 60-day limitation. Also, you can repay a qualified disaster recovery assistance distribution made on account of a hardship from a retirement plan. You have 3 years from the day after the date you received the distribution to make a repayment. Amounts that are repaid are treated as a qualified rollover and are not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover October 2015

21 Transfers/Rollovers/QP Rollovers Automatic Waivers and Private Letter Ruling (PLR) Waivers to the 60-Day Rule Automatic Waivers In order for an IRA Holder to be eligible for an automatic waiver to the 60-day rule, a financial organization must have failed to properly roll over the assets within the 60-day period despite having receipt of the IRA assets. In addition the following must apply: Being rollover eligible, Arriving at the receiving financial organization by the end of the 60-day rollover period, and Being delivered with all necessary paperwork and according to the financial organizations procedures. As long as the above criteria are met, and the IRA funds are deposited in an IRA within one year from the day the assets initially were distributed, no further approval is required from the IRS. It is reported as a rollover in the year received. PLR Waivers Even if a person is not eligible for an automatic waiver of the 60-day rule, the IRS has discretionary ability to waive the 60-day rule if they believe it would be contrary to fairness, not to. Some of the factors they consider when deciding whether to rule favorably on such a request include: Did the financial organization make a mistake in handling the rollover? Were there circumstances outside the IRA Holder s control that made it difficult or impossible to complete the rollover transaction in a timely fashion? (i.e., death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal errors) Was the check/draft cashed and used for other purposes? How much time has passed since the initial distribution? If a customer is eligible for either an automatic or a PLR waiver of the 60-day rule, the most that can be rolled over is what was initially distributed (i.e., no adjustments may be made for earnings that may have been lost as a result of the delayed rollover.) Requesting a waiver for the 60-Day rollover rule requires obtaining a Private Letter Ruling (PLR) from the IRS. The request must follow the same procedures as any other PLR request. The procedures are extensive and usually require the help of the IRA Holder s legal or tax counsel. The IRS includes this information: The procedures for obtaining letter rulings, closing agreements, determination letters, information letters, and oral advice on employee plans, IRAs, and exempt organizations are under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. See Rev. Proc October 2015

22 Transfers/Rollovers/QP Rollovers For the user fee requirements applicable to requests for letter rulings, closing agreements, determination letters, information letters, and oral advice under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division, see Rev. Proc The request for the waiver of the 60-Day rollover rules must include the following fee: (a) Rollover less than $50,000 $500 (b) Rollover equal to or greater than $50,000 and less than $100,000 $1,500 (c) Rollover equal to or greater than $100,000 $3,000 Other Restrictions on Rollover Eligibility In addition to the 60-day rule and the one-rollover distribution per year rule, there are also certain IRA distributions that are not eligible for rollover treatment. These include distributions of: Required minimum distributions (the first money distributed in a year is deemed to satisfy the RMD requirements, however, RMDs can be transferred, as long as they are taken from the new IRA, or another IRA, before the deadline), Assets that are part of series of substantially equal periodic payments made over the single life expectancy of the IRA Holder, or the joint life expectancy of the IRA Holder and a beneficiary, Excess contributions, Assets from Inherited IRAs to nonspouse beneficiaries. (Done as a transfer for IRAs and as a direct rollover from a QRP) If an IRA Holder is otherwise eligible to make a contribution, these amounts may be deposited as annual contributions, but not as rollover contributions. Divorce In the case of an IRA or a portion of an IRA that becomes the property of an ex-spouse as the result of a divorce or legal separation, the IRA assets CAN ONLY BE TRANSFERRED to an ex-spouse s IRA. Even if the court decree states that the IRA assets should be rolled over to the ex-spouse s IRA, they may not be. In that case the decree should be amended through the courts. A financial organization can not do something outside the IRA rules and regulations, and can not do something that is not in the decree. However, the decree must abide by all IRA rules. If the decree states that the ex-spouse must receive a distribution, it must be reported in the name of the original IRA Holder, not the recipient. And the ex-spouse receiving the distribution CANNOT roll it over to his or her IRA. And as always, in extenuating circumstances like this the financial institution should contact their own legal counsel. The IRA Custodian/Trustee does not want to administer this incorrectly. There could certainly be legal issues and of course possible IRS penalties October 2015

23 Transfers/Rollovers/QP Rollovers Beneficiaries and Rollovers As mentioned earlier, nonspouse beneficiaries are ineligible to roll over an inherited IRA to another inherited IRA. Furthermore, although a spouse beneficiary may roll over an inherited IRA, it ceases to be an inherited IRA if the assets are rolled over, and will be treated as the surviving spouse s own IRA from that point forward. In other words, it may not be put back into an inherited IRA. If a spouse beneficiary wants to move an IRA and retain the IRA s beneficiary status (e.g., because he or she is under 59 1 /2 and does not want to pay penalties on distributions), the account should be transferred, not rolled over October 2015

24 Direct Rollovers Transfers/Rollovers/QP Rollovers Transfers and Direct Rollovers Look alike, but they are not! Things that are alike: Check/draft issued to financial institution just like an IRA No withholding of federal income taxes Can have as many as you like in any time period (No one per 12 month period like IRA rollovers) It is not a taxable event Not subject to the 60-day rollover redepositing rule The funds can be mailed, hand carried (not recommended) or sent via wire transfer. Things that are different: Direct rollover is the moving of Qualified Retirement Plan money and a Transfer is the moving of IRA money With IRA transfers you can transfer RMDs, with direct rollovers the RMDs must be removed and distributed to the IRA Holder first Direct rollovers are reportable transactions. IRA transfers are not a reportable event October 2015

25 Indirect Rollovers Transfers/Rollovers/QP Rollovers IRA rollovers and QRP indirect rollovers look alike but they are not the same. Things that are alike: The check is issued to the IRA Holder They have 60-days to re-invest the money That the RMD must be removed before rolling over the balance Withholding rules apply (see below how withholding is applied differently) Things that are different: Rollovers are dealing with IRA money and indirect rollovers are moving QRP money. NOTE: For IRS reporting purposes IRA rollovers, QRP direct rollovers, and QRP indirect rollovers are all reported as a rollover in box 2 on the With an IRA rollover the IRA Holders have the option of having federal withholding taxes withheld whereas in an indirect rollover the QRP administration is required to withhold the 20% federal withholding tax. IRA rollovers only allow one per twelve months per IRA versus in indirect rollovers of QRP money you are allowed as many as the IRA Holder wants. Note: Transfers, Direct Rollovers and Indirect Rollovers can have an unlimited number in any time frame October 2015

26 SECTION 2 Beneficiaries Beneficiaries Spouse vs Nonspouse vs Non-Person Same Sex Marriages Primary vs Contingent Will vs Estate Trust Community Property Statutes October 2015

27 Beneficiaries October 2015

28 Beneficiaries Beneficiaries Types of Beneficiaries There are three main categories of beneficiaries: (1) spousal, (2) nonspousal, and (3) nonperson (including estates, foundations, charities, and trusts). Knowing which type of beneficiary is named is important when determining beneficiary distributions options, which are covered in more detail in Chapter 9. In this chapter, we will only be addressing issues specifically related to what you need to know about different types of beneficiaries in order to open an IRA, including a discussion of community property state issues, and documentation that should be requested when an IRA Holder names a trust as beneficiary. Naming Beneficiaries When an IRA Holder dies, any IRA assets that remain in the IRA must be immediately transferred to the beneficiary of the IRA. If the IRA Holder has not filled out a beneficiary designation, the assets must pass in accordance with applicable state inheritance laws. Although inheritance laws can vary substantially from state to state, in most states, when no beneficiaries are named through a beneficiary designation, it means the IRA assets will become part of the IRA Holder s estate upon death, and this generally means probate court. Not only does this method of transfer increase the potential for disputes over ownership of the IRA assets, it can negatively affect the distribution options available to the beneficiary, so it is highly recommended that IRA Holders use a beneficiary designation form when naming beneficiaries. Most plan agreements have the estate as the default when a beneficiary is not named. But again, state laws may supersede any IRA plan language. Primary Beneficiary(ies) Pro Rata Although the term may sound exclusive, an IRA Holder may name as many primary beneficiaries as he or she likes. A primary beneficiary is a person or entity designated by the IRA Holder to receive a share of his or her IRA assets when he or she dies. The precise portion of the IRA assets the primary beneficiary inherits may depend on three things: 1. Whether the IRA Holder selected a specific percentage for the primary beneficiary to receive; or 2. If no specific percentage was selected, how many primary beneficiaries are surviving, in total, when the IRA Holder dies; or 3. IRA Plan language. Example: Macon Monet establishes an IRA and names his four children, Levin, Lotta, Lucien, and Ernie, as primary beneficiaries. If all four of Mr. Monet s children survive him in death, each will receive his or her assigned percentage of Mr. Monet s IRA, whether it be equal portions (pro rata), or some other allocation arrangement that Mr. Monet has listed, provided the percentages add up to 100%. Note: As long as even one primary beneficiary survives the IRA Holder, secondary or contingent beneficiaries are not considered for for IRA inheritance purposes October 2015