New IRA Rules and Time-Tested Strategies


With the start of a new year IRA season is under way.  Over the next few months you will be inundated with ads by major financial services firms to open and contribute to an IRA with them.  As far as part about opening an account and/or making a contribution this is a good idea for many of us.


Here is an update about two new IRA rules and some discussion of some time-tested IRA strategies.

New IRA rule – 60 day rollover 

IRA account holders and financial advisors need to be aware of a change to the 60 day rollover rule for IRAs.  In the past you could take money out of your account and do whatever you wished with it as long as the money went back into the original IRA account or another IRA account within 60 days.  You were allowed to do this once every 365 days for each IRA account with no income tax consequences.

A tax-court case last year resulted in a ruling that this once per year tax-free rollover is limited to one IRA account once per 365 day period.  So if you have multiple IRA accounts and had planned to use the loophole to do a rollover from more than one account you are now out of luck.

Note this does not apply to a trustee-to-trustee transfer.  This means, for example if you have an IRA account at your local bank and wish to transfer this account to a custodian like Fidelity you can do this without the limitation above as long as you have the money transferred between the two entities and you don’t touch the money.

If you have the bank write you a check for the value of your account the 60 day clock starts for you in terms of needing to deposit that check into the new IRA account.  And if you have taken a rollover distribution from any IRA account within the last 365 days this is now a taxable distribution.  IRA account holders and their financial advisors need to be aware of this rule as violating it can be costly.

New IRA rule – Inherited IRAs 

Inherited IRAs can be a great way to pass your IRA account to heirs if there is no spousal beneficiary.  A typical example that I’ve seen is using this vehicle to leave the IRA or a 401(k) account to adult children by a parent when they are single via the prior death of their spouse or due to a divorce.

Retirement accounts typically offer protection from creditors.  Until a 2014 ruling by the Supreme Court nobody was really sure whether inherited IRAs left to non-spousal beneficiaries were retirement plans or simply just inherited assets that were passed down.  The court’s ruling stated that inherited IRAs do not have creditor protection as they are not retirement accounts.

The implications of this will vary.  If your heirs are responsible with their money and are not in a high risk profession such as delivering babies or others prone to law suits this rule probably does not have much impact.

IRAs left to a spouse that he or she then makes their own are likely not impacted by this ruling.

IRA expert Ed Slott offered these thoughts in a Bankrate piece via Yahoo! Finance:

“There are some ways to protect heirs from themselves: for instance, by leaving assets to a trust. Leaving an IRA to a trust is more complicated than leaving regular money. 

Another option skips the hassle and uncertainty of leaving an IRA to a trust: Take the money out of the IRA and buy life insurance. 

“You could leave the IRA to a trust, but that’s complicated because the IRA has distribution rules. So it gets complicated to throw that into a trust; life insurance is a much easier asset to go to a trust,” Slott says. “Spend down some of your IRA, put the rest in a life insurance policy. Leave that to a trust for the kids.” 

That way, the kids will end up with tax-free money with no distribution rules attached. Plus the money would be creditor-protected. 

That said, IRA owners with smaller accounts shouldn’t go to the trouble. Try to get your kids’ spending under control while you’re still in the pink. “If they blow it, they blow it. What more can you do?” Slott asks.”

My take is that using a trust is a hassle and you should work with an advisor who really understands the pros and cons of this route before doing this.  Likewise with life insurance .  The asset protection and tax advantages might be there but do they outweigh the cost of the insurance and the often high internal expenses of the policy that will apply to the cash value inside the policy?

Time-tested IRA strategies 

IRAs remain a great retirement savings vehicle.  Here are a few thoughts and strategies that have stood the test of time.

Open an account and get started. Like anything else this tool doesn’t work unless you have one.  The contribution limits remain at $5,500 in 2015 with an additional $1,000 allowed for those 50 and over.  You can still make a 2014 contribution up until April 15, 2015.

Choose an IRA custodian carefully.  Look at any account fees, the availability of the investment vehicles that you are likely to use, transaction costs to buy and sell investments and perhaps other services outside IRAs offered by this custodian.

Consolidate accounts. If you have multiple IRA accounts make this the year that you look at consolidating these accounts.  It will be easier to manage your investments in one account versus multiple accounts.  You will eliminate any fees on these other accounts and you might benefit in terms of any transaction fees by having more money with a single custodian.

Do something with your old 401(k) accounts. It is not uncommon for people to have worked at five or more jobs during the course of their career.  All too often I see several old 401(k) accounts from former employers just sitting there, neglected.  By this I mean that they are not being watched, the investments in the account haven’t been looked at in years, etc.  One solution is to roll these accounts into an IRA account.  This consolidation can make sense for the reasons mentioned in the last point.  It might also make sense to leave the account where it is if the investments offered by the plan are solid and low cost.  Likewise, if applicable, it can make sense to roll these balances into a new employer’s plan.  Whatever the right answer come up with that answer and act on it.

Invest your IRA as part of an overall strategy.  Don’t invest your IRA account in a vacuum.  This and all investment accounts should be a part of an overall investment strategy ideally based upon your financial plan.

Don’t forget your required minimum distributions. If this applies to you be sure to take these distributions by the deadline.  Failing to do so can result in a hefty penalty.  If you have multiple IRA accounts pay attention to all of them.  Holders of inherited IRAs might not benefit from their custodian calculating the RMD as is the case with regular IRAs.  Nonetheless they are still required if they apply to your situation.  RMDs might also apply to a 401(k) with an old employer as well.

Make sure your beneficiary designations are up to date. As part of your estate planning efforts IRA accounts will pass to your heirs via a beneficiary designation which overrides anything that you might have in a will.  This also applies to other retirement accounts, annuities and life insurance policies as well.  Nothing says “I love you…” to your spouse quite like them finding out that you never changed the beneficiary designation on your $1 million IRA account from your ex-spouse after the divorce.  Were this to be the case your current spouse would likely be out of luck.

The Bottom Line 

IRAs can offer many advantages to retirement savers.  Traditional and Roth accounts are both excellent vehicles depending upon your situation.  It is important to select the right IRA custodian.

New rules for the 60 day rollover and inherited IRAs should be noted and you should understand the consequences, if any, for your situation.

Most of all make sure you are managing existing IRA accounts to their fullest potential.  Also if an IRA contribution makes sense for you there is no time like the present to get started.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  


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