Advanced Underwriting Consultants

Ask the Experts – June 11, 2014

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client received a distribution from his 401(k) plan. The distribution was comprised mostly of stocks and bonds which he sold shortly after the distribution. Can he still roll the proceeds over to an IRA if he’s still within the 60-day period, or does selling the distributed property preempt him from completing the rollover?

Answer: Your client may complete the rollover as long as the 60-day period has not expired even though he sold the distributed property.

When the property is distributed, the participant’s basis in the property is generally equal to its fair market value. If the participant sells the distributed property for a gain within the 60-day period, he may still complete the rollover and contribute all of the proceeds from the sale to his IRA. Additionally, no gain (or loss, if applicable) will be recognized if he completes the rollover.

For example, let’s say your client took a complete distribution from his 401(k) plan, which consisted of various stocks worth $300,000. Assume he holds on to the distributed property for 45 days, and the stock value increased to $310,000 in total. Your client then liquidates the stock for $310,000, resulting in a $10,000 gain. Under this situation, your client may still roll over the $310,000 cash proceeds from the sale of the stocks. Additionally, if he rolls over the full amount, he will not have to pay taxes on the gain portion until he withdraws the funds from the IRA.

Sources: I.R.C. § 402(c)(6).

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Ask the Experts – March 26

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I recently read somewhere that the one-rollover-per-year rule for IRAs applies to the individual based on all of his IRAs, and not each IRA individually. Is this a new rule? Is it effective immediately?

Answer: Yes, it’s the law, but the IRS has recently released an announcement delaying its enforcement until 2015 at the earliest.

We’ve written about the new rule a couple times, which you can find here, discussing how the Bobrow case changed the rule to apply per-individual, not per-IRA; and here, discussing that the one-rollover-per-year rule don’t apply to direct rollovers.

In Announcement 2014-15, the IRS acknowledged that the Bobrow rule is a new interpretation and that it might cause difficulty for some administrators. Therefore, it stated that although the one-rollover-per-year limitation still applies, the IRS is providing transition relief for IRA owners by not applying the Bobrow interpretation of the rule before January 1, 2015. This means that individuals can still accomplish multiple 60-day rollovers until 2015, as long as they fall within the parameters previously published in IRS Publication 590.

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Ask the Experts – March 24

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client mistakenly rolled over funds from his traditional IRA to his SIMPLE IRA. Is there a way to correct this error without incurring any penalties or tax liabilities?

Answer: Yes, he can later recharacterize the amount as a contribution to another traditional IRA assuming the contribution was made via a trustee-to-trustee transfer and the recharacterization was made by the due date (including extensions) of his tax return for the year in which the contribution was made. Additionally, your client must:

    • Include in the recharacterization transfer any income allocable to the contribution.
    • Report the recharacterization on his tax return for the year during which the contribution was made.
    • Treat the contribution as having been made to the second IRA on the date it was actually made to the SIMPLE IRA.

Also, your client must notify the trustees involved of the recharacterization, and supply the trustees with certain information, including:

    • The type and amount of the contribution to the SIMPLE IRA that is to be recharacterized.
    • The date the contribution was made and the year for which it was made.
    • Directions for the SIMPLE trustee to transfer the original contribution to the trustee of the traditional IRA.
    • The name of both trustees.
    • Any additional information needed to make the transfer.

Form 8606 should be used to report the recharacterization.

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Ask the Experts – March 14

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a governmental 457(b) account to which he rolled over funds from his former employer’s retirement account. Under the old plan, he could receive distributions after he reached age 59 ½, but under his current 457(b) plan, he cannot access the funds until he is age 70 ½. If the rollover amounts are separately accounted for in the 457(b) plan, can my client still access the rolled over funds after he reaches age 59 ½?

Answer: Yes, he can access the rollover contributions prior to age 70 ½ as long as the governmental 457(b) plan documents allow it.

The general rule is that 457(b) accounts cannot be accessed until the participant:

  • Reaches age 70 ½;
  • Stops working with the employer; or
  • Is faced with an unforeseeable emergency.

However, the IRS issued Revenue Ruling 2004-12, holding that the restrictions on distributions do not apply to rollover contributions:

If the receiving plan is a § 457 eligible governmental plan or a tax-sheltered annuity described in § 403(b)(7) or (11), amounts attributable to rollovers that are maintained in separate accounts are permitted to be distributed at any time even though distribution of other amounts under the plan or contract is restricted pursuant to § 457(d)(1)(A) and § 403(b)(7) or (11), respectively (emphasis added).

Therefore, the client could receive a distribution of that money prior to age 70 ½ (or severance from employment or an emergency). However, keep in mind that the 10-percent penalty under section 72(t) still applies if your client is younger than age 59 ½.

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Ask the Experts – February 25

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Does a direct trustee-to-trustee transfer of an IRA count as a rollover contribution for purposes of the one-rollover-per-year rule? Does a rollover from a qualified plan to an IRA count against the one-year rule?

Answer: No and no.

In Revenue Ruling 78-406, the IRS ruled that the one-year waiting period between rollovers applies only for 60-day rollovers—not for direct rollovers. For example, if an account holder has one IRA that he wants to split into three or more IRAs, he could do a 60-day rollover for one, and direct trustee-to-trustee transfers for the other IRAs.

The one-year waiting period also doesn’t apply for rollovers from a qualified plan to an IRA. The waiting period only applies to rollovers where the funds were received from an IRA—not a qualified plan.

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Ask the Experts – January 10

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client thinks he can avoid taking required minimum distributions (RMDs) by distributing all of the funds late in 2013, and then completing a 60-day rollover early in 2014. I know he’s wrong, but I can’t put my finger on why.

Answer: You are correct that your client cannot avoid RMDs this way.

In determining the amount of RMDs taken for a given year, the general rule is that the measuring date for a retirement plan’s account balance is December 31 of the previous year. For example, in determining the amount a taxpayer must withdraw from his retirement plan in 2014, he would identify the plan’s account balance as of December 31, 2013.

If no other exception applied to your situation, then your client’s plan would actually work to avoid taking RMDs because on December 31, 2013, the client’s account balance would be $0—so no RMD would be due in 2014.

However, the IRS has ruled differently in Regulation Section 1.401(a)(9)-7, A-2:

If the amount rolled over is received in a different calendar year from the calendar year in which it is distributed, the amount rolled over is deemed to have been received by the receiving plan in the calendar year in which it was distributed.

This rule applies to your client’s situation because the amount rolled over was received in 2014, but distributed in 2013. Therefore, your client would be deemed to have received the rollover proceeds in 2013. Since the new plan is deemed to contain the rollover proceeds in 2013, the account balance as of December 31, 2013, would equal the amount of the rollover.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Question of the Day – August 14

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has money left over in her health savings account (HSA).  Can the balance be rolled over tax free to an IRA?

Answer: No.  A taxpayer can do a one-time funding rollover of an IRA to HSA account, but rollovers are NOT permitted from HSAs to IRAs.

Here’s a description of the rules with regard to the funding rollover, excerpted from IRS Notice 2008-51:

Section 408(d)(9) provides, in general, that a qualified HSA funding distribution from an individual’s IRA or Roth IRA to that individual’s HSA is not included in gross income, if the individual is an eligible individual under § 223(c)(1)….

For purposes of § 408(d)(9)(C)(i), a qualified HSA funding distribution from the IRA or Roth IRA of an eligible individual to that individual’s HSA must be less than or equal to the IRA or Roth IRA account owner’s maximum annual HSA contribution. The maximum annual HSA contribution is based on (1) the individual’s age as of the end of the taxable year and (2) the individual’s type of high deductible health plan (HDHP) coverage (self-only or family HDHP coverage) at the time of the distribution. For example, in 2008, an IRA owner who is an eligible individual with family HDHP coverage at the time of the distribution and who is age 55 or over by the end of the year is allowed a qualified HSA funding distribution of $5,800, plus the $900 catch-up contribution. An IRA or Roth IRA owner who is an eligible individual with self-only HDHP coverage, and who is under age 55 as of the end of the taxable year, is allowed a qualified HSA funding distribution of $2,900 for 2008….

Generally, only one qualified HSA funding distribution is allowed during the lifetime of an individual. If, however, the distribution occurs when the individual has self-only HDHP coverage, and later in the same taxable year the individual has family HDHP coverage, the individual is allowed a second qualified HSA funding distribution in that taxable year. Both distributions count against the individual’s maximum HSA contribution for that taxable year.

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Question of the Day – August 9

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Here’s the question of the day.

Question: My client’s husband died earlier this year.  She is a 50% beneficiary of his IRA, along with their son who is beneficiary of the other 50%.  Can she roll over her 50% interest into her own IRA?

Answer: The general rule is that the surviving spouse must be the sole beneficiary of an IRA to be eligible to make a rollover into her own account.

If the account remains intact, with a combined spouse/son beneficiary combination, RMDs must be taken from the account by the beneficiaries based on the age of the older beneficiary.  In this case, that’s probably the surviving spouse’s age.  The first RMD would be due by the end of the year after the decedent’s death.

On the other hand, it’s possible for the inherited account to be separated.  The current IRA custodian should be consulted to find out their procedure for separating into separate beneficiary accounts.  If the separation is done by September 30 of the year after the decedent’s death, each beneficiary will considered to be the sole beneficiary of their portion of the IRA.

If separation is completed before the deadline, the surviving spouse will be able to exercise a rollover to her own IRA from her portion if desired, and the son can elect to stretch distributions from his separate part based on his own age.

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Question of the Day – August 1

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I am working with the widow of a member of the military.  Can she roll over the death benefit she received from his government insurance to a Roth IRA?

Answer: Maybe.

Here are the rules taken from IRS Publication 590:

Military Death Gratuities and Servicemembers’ Group Life Insurance (SGLI) Payments

If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. The contribution is treated as a qualified rollover contribution.

The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers.

The rollover must be completed before the end of the 1-year period beginning on the date you received the payment.

The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.

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Question of the Day – April 12

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Here’s the question of the day.

Question: I am working with a widow whose husband passed away, leaving his estate as beneficiary of his IRA.  The surviving wife is the sole beneficiary of the estate.  Can she roll over the IRA to her own account?

Answer: According to a recent private letter ruling, the answer is yes.

In Private Letter Ruling 201211034, the IRS dealt with a situation where the decedent’s estate was the beneficiary of an IRA, and the surviving spouse was the sole heir of the decedent.  In the PLR, the IRS decided that the surviving spouse may

(1)    by means of a trustee-to-trustee transfer, transfer the proceeds from the original IRA into an new IRA established and maintained in the spouse’s name; or

(2)    take a distribution from the original IRA and roll over the proceeds into a new IRA in the surviving spouse’s under the 60 day rollover rules.

Even though a private letter ruling can’t be relied on as final law, it does indicate how the IRS looks at the particular tax issue involved.

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