Know your IRA – Know the recent IRA updates

UPDATE NO. 1
A year ago, I wrote about the case of In Re: Clark.

In that case, a mother named her daughter as the beneficiary of the mother’s IRA. When the mother died, the daughter properly titled the IRA as an inherited IRA.

She took required minimum distributions for a few years. Then the daughter and her husband filed for bankruptcy.

The couple’s creditors argued that the IRA should be available to the creditors and not protected in bankruptcy.

The Seventh Circuit Court of Appeals agreed.

While retirement plan accounts are exempt from the claims of creditors, the court concluded that when an IRA is transferred to a beneficiary, it is no longer a true retirement plan account. Therefore, it is available to creditors.

The case was appealed to the United States Supreme Court.

Unfortunately, the Supreme Court recently agreed with the Court of Appeals.

Despite the Supreme Court decision, planning can be done to protect an inherited IRA from the claims of creditors.

The technique is to name an IRA Trust as the beneficiary of the IRA.

The family member who otherwise would be the beneficiary of the IRA is then named as the beneficiary of the IRA Trust.

 

UPDATE NO. 2
The Internal Revenue Code provides that an IRA may be rolled over once during any 365-day period.

The IRS consistently interpreted this provision to mean that it applies separately to each IRA that a taxpayer may own.

If a taxpayer owns three IRA’s, she may roll over each IRA once during any 365-day period.

The IRS published its interpretation of the rule in instructions to the tax forms and in proposed regulations.

In the recent case of Brobow v. Commissioner, the U.S. Tax Court held that the once a year rule applies to all IRA’s that an individual owns.

Thus, if an individual rolls over IRA #1, she cannot rollover IRA #2 until waiting more than one year.

In light of the Tax Court decision, the IRS has withdrawn its proposed regulations.

Note, however, that the new rule applies only to rollovers.

A rollover is when an individual receives cash from an IRA and then deposits the cash back into the IRA or into a new IRA within 60 days of taking the distribution.

The new rule does not apply to a direct transfer of funds from one IRA to another IRA.

These developments underscore the importance of knowing and abiding by all of the retirement plan rules.