Spouses Behaving Badly

PLR Tackles 60-Day Rollover Rule

Today we are going to take a look at Private Letter Ruling 201324022, in which IRS waived the rollover requirement due to a fraudulent withdrawal by the husband in this case. We look at the case and the ruling below.

A taxpayer we will call Debra asserted that her husband, who we will call Bill, took a distribution from her IRA without her knowledge or consent on January 5, 2009. Debra contended that her failure to accomplish a rollover within 60 days was due to the fraudulent withdrawal of amounts from her IRA without her consent.


When Debra and Bill wed in 2001, he completed powers of attorney documents as part of the couple's estate planning. Debra understood and intended that the power of attorney be valid for contexts in which she became incapacitated, disabled, or otherwise unable to make her own financial decisions. She did NOT understand or intend to empower Bill to make all financial decisions on her behalf.

Bill took a distribution from Debra's IRA and asserted orally and in writing that he was acting in his capacity as Debra's power of attorney and that he needed the distribution for Debra's medical expenses. Debra asserted that she did NOT need the distribution for medical expenses nor did she communicate any such need to Bill. She then discovered that Bill lost the entirety of distributed funds because of a gambling addiction.

Debra revoked the power of attorney and provided substantial documentation of Bill's gambling addiction, including a statement from a treating physician. Debra requested a ruling from the Internal Revenue Service to waive the 60-day rollover requirement, allowing her to re-deposit the distributed funds back into her IRA.

The IRS ruled in her favor and granted a period of 60 days from the ruling letter's issuance to redeposit funds into her IRA.

Lesson to Learn: 
IRS will generally grant waivers of the 60-day rollover period when the problem is something that is out of the account owner's control. They will consider factors such as illness, mistakes by a custodian, delays in the mail, and fraudulent transactions. This PLR highlights the issue of powers of appointment. While they can be very helpful when an individual is truly unable to take care of their affairs, they can also be used to commit fraud. Consider carefully the powers you give over your finances to others and the circumstances that will allow them to act.

Roth IRAs and the “5-Year Clock”

Since a Roth IRA is a retirement vehicle, your Roth contributions are subject to the IRS distribution rules. You may only take qualified distributions from a Roth income tax and penalty free. To be deemed “qualified,” two requirements must be satisfied:

This seems pretty cut and dry but misunderstandings about the “5-year clock” are not uncommon – a lot of Roth IRA owners are unsure when their “5-year clock” really began.

With respect to Roth IRAs, your 5 year clock begins on January 1st in the year you opened and funded your first Roth IRA. For purposes of this rule, if you make your first Roth IRA contribution but subsequently remove it, your 5-year clock has not yet begun. To illustrate, assume you made your first Roth IRA contribution on August 1, 2015, but later decide to remove that contribution and its earnings on March 1, 2016. Also assume you make a contribution on February 1, 2016 to that same Roth IRA. When does your “clock” begin? Under this fact pattern, your Roth IRA clock will begin January 1, 2016, not 2015.

Roth IRA conversions have a separate and distinct clock. For example, if you funded your first Roth back in 2010 and converted one of your traditional IRAs to a Roth this year that newly converted Roth IRA has its own 5-year clock that began this year on January 1, 2016.

What if you inherit a Roth IRA? An inherited Roth IRA has its own clock too. The 5-year clock for any Roth IRA you inherit carries over from the decedent.

The Importance of Understanding IRA Beneficiary Selection

Can You Name a Non-Individual or Entity?

Yes. Anyone or anything can generally be the beneficiary of your retirement assets such as IRAs, 401(k)s and annuity contracts. For example, an ailing client asked if he could name his trust as his IRA beneficiary. Provided the IRA custodial agreement permits him to name entities, yes, he may.

However the question becomes: does he really want to do that? What the client failed to realize was that his wife and older brothers were also named as trust beneficiaries. The IRS has made it very clear that when a trust is the beneficiary of an IRA, the oldest trust beneficiary’s life expectancy is the measuring life. Thus, his

children and very young grandchildren would be stuck with a significantly shorter distribution period. The client erroneously thought each trust beneficiary could use their own individual life expectancy to receive RMDs.

Does It Matter Whether You Name A Spouse or Non-Spouse Beneficiaries?

Yes. Spousal beneficiaries and non-spouse beneficiaries do not have the same options when it comes to inheriting an IRA. For example, a surviving spouse generally may elect to treat an inherited IRA from the deceased spouse as his or her own or choose to rollover the IRA into their own existing IRA. Non-spouse beneficiaries never have those options available. Distribution options for non-spouse beneficiaries are far more limited under IRS rules. IRA custodians also may limit distribution options for inherited IRAs.

What Options Do Your Beneficiaries Have?

Does your custodian permit your heirs to use a multigenerational IRA distribution strategy? This vital information will be found in your custodial agreement and other custodial documents issued by your financial institution such as amendments. If you are unsure or want to confirm how your hard earned money will flow when you are gone, your retirement distribution specialist can help you by conducting a Custodial Review. This is a complimentary service that costs you nothing but can really pay off for your heirs by thousands of dollars down the line.

What is Net Unrealized Appreciation?

QUESTION: CAN I AVOID TAXATION ON THE APPRECIATION OF MY COMPANY STOCK?

NET UNREALIZED APPRECIATION (NUA)
Money you make on the appreciation of an asset over time is called capital gains. Those gains are measured by the price the stock is sold for, minus the original purchase price of the stock when acquired. If your 401(k) plan holds stock from your employer and that stock appreciates over time, its fair market value will be considerably higher than its cost basis when you retire. The difference in the value of the stock from the time of purchase to the time of withdrawal is called Net Unrealized Appreciation.

A SPECIAL TAX BREAK
Special tax rules regarding NUA allow you to withdraw company stock from your retirement plan, retain ownership of the stock, and pay ordinary income tax on the acquisition price rather than its fair market value at the time of distribution.

WHAT HAPPENS WHEN I SELL THOSE SHARES?
Should you choose to sell the shares, you pay the long-term capital gains tax rate in effect on the appreciation and the applicable capital gains rate on any additional appreciation since distribution.

OUR ATS EXPERTS CAN EXPLAIN OTHER STIPULATIONS IN THE CODE INVOLVING NUA:

• To qualify for the break, you must take the entire pension plan account balance in a lump-sum distribution over the course of one tax year.
• Dividends paid on the stock are not tax-deferred.
• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your America’s Tax Solutions retirement distribution specialist can describe for you how this strategy works, and how it may affect you and your heirs.

Thinking of a Self-Directed IRA (part 2)

2. IRA custodians and IRA LLC facilitators often miss legal and tax problems. It never ceases to amaze me when IRA account owners tell me that what they have done with their IRA (or IRA LLC) – or what they plan to do in the future – is okay “because their custodian said so.” There are numerous problems with this statement. First, IRA custodians and IRA LLC facilitation companies are not in the business of advising IRA owners on the subtleties of IRA legal and tax issues. These companies do not practice law, provide financial advice, or otherwise provide their clients with investment or tax advice. In fact, all IRA custodians and IRA LLC facilitators have language in their contracts that say things like “you are solely responsible for the success or failure of your account” or “we are not advising you on legal or tax issues.”

Second, although IRA custodians do their best to train their representatives to recognize obvious legal and tax problems, the ultimate motivation of IRA custodian and IRA LLC facilitator employees is to establish as many accounts as possible (i.e. more commissions). The result is that these representatives often glaze over the legal parameters and/or ignore key facts that might cause legal and tax problems. After all, it is not the employee’s problem if the IRA account holder violates the IRA rules.

The third potential problem with relying on the advice provided by an IRA custodian or IRA LLC facilitation company is that not all IRA legal and tax issues are “black and white.” For example, the “prohibited transaction” rules (which, if violated, can result in an IRA being treated as fully distributed to the IRA owner in one lump sum = terrible tax consequences) state that a “disqualified person” includes an IRA account holder’s spouse – in other words, no financial interactions can occur between the IRA and the IRA account holder’s spouse. However, this does not mean that a loan from IRA to the IRA account holder’s girlfriend is legally proper. In fact, the IRS has the ability to scrutinize any IRA investment that creates a “conflict of interest.” This is a simple example of the intricacies involved in the federal law that IRA custodians and IRA LLC facilitators either are not aware of or choose to ignore.

3. IRA tax returns – the tax compliance black hole. Many self-directed IRA (and IRA LLC) account owners are completely unaware that there are certain situations where the income earned by their self-directed IRA is not exempt from current tax (i.e. their IRA must file a tax return and pay a tax). Generically speaking, these situations occur when the IRA earns income that is “debt-financed” for from an “operating business.” However, the devil is in the tax details when it comes to these situations. In addition, because the IRA custodians and IRA LLC facilitators take a completely hands-off approach, many of these situations are entirely unreported to the IRS, and thus lead to a potential ticking time bomb (think: IRS audit).

For example, consider a situation in which a self-directed IRA (or IRA LLC) invests into a real estate partnership that has four other owners (which might or might not be other IRAs). The partnership then uses the initial investors’ funds along with a bank loan to purchase a piece of vacant land. The partnership then builds several houses on the property and sells all of them for a substantial profit. At the end of the tax year, the partnership will issue tax forms to the investors showing each investors’ share of the partnership’s gain. For the IRA investor, the forms will go to the self-directed IRA account holder (or IRA LLC’s Manager). This situation will definitely trigger a tax filing requirement for the IRA (due to development being considered an operating business and/or due to the debt-financing), but unfortunately the IRA custodian might never realize that this situation has occurred. Further, if the IRA account holder is unaware of the rules, a “tax compliance black hole” will emerge.

Summary: The issues above demonstrate the importance of IRA account holders speaking with experienced legal and/or tax professionals before moving forward with a self-directed IRA (or IRA LLC) formation and investment. If there is one thing that my experience with self-directed IRA investors has taught me, it is that up front education is critical in order to prevent both immediate and long term legal and tax compliance violations.

Thinking of a Self-Directed IRA (Part 1)

Introduction: The popularity of investing retirement accounts into “non-traditional” assets (e.g. real estate, private lending, and everything else you can imagine) using a self-directed IRA or an IRA-owned LLC (“checkbook control” IRA) has increased rapidly, perhaps too rapidly, since the economic meltdown in 2008. This growth has brought increased mainstream media attention, scams, and a huge amount of legal and tax non-compliance.

The unfortunate reality is that most self-directed IRA account holders do not receive a sufficient amount of

legal/tax education prior to investing. The reasons for this include: (1) the account holder’s normal “gatekeepers” (e.g. attorneys, accountants, financial advisors) are either unfamiliar with the rules or are kept completely in the dark because the account holder is afraid that their advisor will not approve; (2) the account holder receives incorrect or misleading information on the internet; (3) information is provided by representatives/salesman of IRA custodians or IRA LLC facilitators who are financially motivated to “sell” the particular self-directed IRA product that their employer provides; and (4) the IRA custodians and IRA LLC facilitators are not legally representing the IRA account holder (nor are they trained to do so), but rather providing “casual information”.

All of the confusion and misinformation has lead me to create the following top 3 reasons why an IRA account holder should speak with a tax attorney before forming a self-directed IRA (or IRA LLC):

1. Not all IRA custodians (and self-directed IRAs) are created equal. Two initial issues that should be carefully considered by a retirement account owner prior to setting up a self-directed IRA are: (1) “what custodian should I use” – there are actually a lot more of these custodians out there than you might think; and (2) “will the IRA invest directly or through an IRA-owned LLC structure”? Failure to consider these issues and rashly transferring funds to a particular custodian because “my neighbor uses them” can lead to administrative hassle, unnecessary fees, and other problems. Call 1-866-225 1786 for more information:

The fee structure of self-directed IRA custodians can vary dramatically, for example: some charge higher setup fees and lower revolving fees; some charge fees based on the IRA’s value; some charge fees based on the number and type of assets owned by the IRA; some charge fees when the IRA pays an expense, receives income, and/or custodian action is required in any way; and some even charge fees for “research” and account termination. In addition, the amount of “compliance” paperwork that is required when the IRA executes a transaction varies significantly between custodians – which, when an investment requires immediate action (e.g. real estate foreclosure auction), can be the difference between the IRA purchasing the asset or missing out on an opportunity. In short, no two custodians are exactly alike, so a thorough vetting based on the account holder’s likely IRA investment is essential.

Which custodian is the best fit for a particular account owner depends on the type of investments that will be made and the corresponding involvement of the custodian going forward. For example, purchasing rental real estate within a self-directed IRA is a very popular type of investment, but also leads to expenses that must be paid by the IRA (e.g. property taxes, insurance, maintenance and improvement costs, and possibly mortgage payments). The IRA custodian’s procedure for dealing with these expenses (and the transaction fees the custodian charges for this service) is a very important issue that should be considered by the IRA account holder before setting up an IRA.

Finally, if the IRA account holder chooses to gain the maximum amount of control by setting up an IRA-owned LLC, the account holder will generally want to pick a very low cost custodian. The reason for this is that the custodian will not be involved in the day-to-day investment decisions, which instead will be made at the “LLC level.” In short, why pay a custodian high fees to do almost nothing?

'Tis the Season

Few CPA firms see tax season as the time for investing hours in business development. But those who have, have come to realize that there is no better time to evaluate the service experience for your clientele and talk about issues that matter the most to your very best clients.

Like it or not, your clients rate getting their taxes done as one of their least favorite activities. This year you should commit to improving your clients experience and your revenue thereby making this the most successful tax season you have ever had. While filing the clients taxes is certainly important many even more critical opportunities to assist your clients exist during tax season. Clients want to know how to maximize their retirement accounts and minimize taxes. They want to know how to minimize the devastating effects on their nest eggs from the risk of living too long, low interest rates, market volatility, excessive taxation, and long-term care expenses. Study after study indicate that clients want you to take an active role in resolving these issues.

The time to do this is during tax season. Accountants are often their clients most trusted advisors. They possess highly specialized, financial skills. Those two things position them well to give financial planning advice. Yet many accountants and tax professionals are reluctant to add this potentially lucrative service to their practice or to team up with an outside advisory firm to provide.

Many of the most successful firms have felt compelled to enter the wealth preservation field. These accountants are committed to the clients well-being and want to provide them with top-notch advice. They also recognize that clients want them involved.

During this informative 60 minute webinar we will discuss why so many accountants and tax professionals are expanding into offering financial and wealth preservation strategies to their clients. Smart firms understand this is an excellent added value that deepens clients relationships, encourages retention and is ultimately a driver of revenue growth. This webinar will share important insights on the role of an account in providing financial planning advice and explains how you can overcome the challenges holding you back, sharpen your skills, and create a practice that steers clear of conflicts of interest.

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