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Recent Changes in the World of IRAs

July 18, 2014

Timothy P. Barry, CPA/PFS, MST, CFP®, CRPC®
Tax Principal

Both the U.S. Supreme Court and the U.S. Tax Court recently issued opinions dealing with individual retirement accounts (IRAs). This article shares two rulings regarding inherited IRAs, as well as tax-free rollover contributions.

Inherited IRAs

The Supreme Court case, Clark v. Rameker, dealt with the issue of whether an inherited IRA qualified as a retirement fund for purposes of Section 11 bankruptcy protection. The Court held that inherited IRAs (as opposed to IRAs funded by the taxpayer) were more akin to a “pot of money” which could be spent freely rather than as a retirement fund. As a result, inherited IRAs were found not to qualify as protected assets under Chapter 11 §522(b)(3)(C). However, you should consult your attorney with any questions regarding creditor protection.

Tax-Free Rollover Contributions

In the Tax Court Memorandum decision (Alvan L. Bobrow et ux. v. Commissioner), the Court dealt with tax-free IRA rollover contributions. The Internal Revenue Code allows a taxpayer to withdraw funds from an IRA tax free as long as the funds are re-deposited into an IRA within 60 days (referred to as a rollover contribution). Under Section 408(d)(3)(B), the law only allows one tax-free rollover contribution within a one-year period. The taxpayer in the Tax Court case read the Section 408(d)(3)(B) limit as applying to each IRA separately and, as a result, asserted that multiple tax-free rollover contributions could be made during the one-year period as long as the distributions were not taken from the same IRA. Proposed Regulation §1.408-4(b)(4)(ii) also interpreted the law as applying to each IRA separately.

The Court, however, found that the Section 408(d)(3)(B) limit on a taxpayer’s ability to use the 60-day rollover period only once in a one-year period applies to all IRAs maintained by the taxpayer. As a result, if a taxpayer takes a distribution from an IRA and treats the distribution as tax free because the funds are rolled over within 60 days, they are precluded from using the 60-day tax-free rollover rule on a subsequent IRA distribution within the one-year period, even if the second distribution is taken from a different IRA than the first distribution. The IRS has indicated that it will follow the Court’s holding and has withdrawn its proposed regulations to the extent necessary to follow the Court’s position. However, the IRS will not apply the Tax Court’s interpretation to any IRA distribution occurring prior to January 1, 2015.   

For more information, please contact Tim Barry at tbarry@blumshapiro.com or 781.610.1214.


Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.

 

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