ROLLOVERS TO INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)

The Financial Industry Regulatory Authority (FINRA) has increased scrutiny on IRA rollover recommendations. It

issued Regulatory Notice 13-45 to remind financial firms of their responsibilities when recommending rollovers

to IRAs by employer-sponsored plan participants who are terminating employment.

Rollover considerations

Participants of employer-sponsored retirement plans [401(k), profit sharing, 403(b), etc.] typically have

several options when they terminate employment:

• Leave the money in the former employer’s plan, if permitted

• Roll over the assets to a new employer’s plan, if one is available and rollover contributions are permitted

• Distribute the assets

• Roll over assets to an IRA

Each alternative may have advantages and disadvantages, based on an individual’s needs and

circumstances, and all of the following issues or items should be carefully considered:

Employer-Sponsored Retirement Plan

IRA

Investments Number and type may be restricted by the plan.

If mutual funds, less expensive institutional share

class may be used.

Usually broader array of products

available.

Fees

What are investment expenses. Advisor expenses.

Are administration/recordkeeping fees charged to

participants, or does the employer pay them.

Charge for distributions to an IRA.

Annual Custodial fee.

Stifel = $40/year; $30 if multiple accounts

in a household.

Transaction and/or advisory fees that vary

depending on the product and/or program

selected.

Services

Do you have access to investment advice,

planning tools, telephone help lines, educational

materials, and workshops.

Do you have access to planning tools,

telephone help lines, and educational

materials, or advice, full brokerage

services, and financial planning.

Penalty-Free

Withdrawals

Age 59 ½. Some penalty exceptions may apply.

Age 55 if separated from service with sponsoring

employer during the year in which or after

attaining age 55.

Age 59½. Some penalty exceptions may

apply.

Taxation

Ordinary income tax assessed at distribution

(exception for Roth and after-tax contributions).

Ordinary income tax assessed at

distribution (exception for Roth and

after-tax contributions).

Required

Minimum

Distributions

(RMD)

Generally must begin at age 70 ½, but may be

delayed until retirement, if still employed by plan

sponsor and the plan allows.

RMDs may not be rolled over to an IRA.

Must begin at age 70 ½ (exception for

Roth IRAs).

Employer Stock Tax benefits available for distribution of shares of

highly appreciated stock (NUA election).

N/A

Loans

May be available while still employed.

No loans permitted.

Protection from

Creditors

Unlimited protection from creditors under federal

law.

Protection in bankruptcy proceedings only;

state laws vary.

Roth

Conversion

Plan may allow for Roth contributions and also

in-plan conversions.

Pay tax on conversion, then Roth

IRA distributions are tax-free (certain

restrictions apply).

                                                                                   Second Quarter 2014

Retirement

Plans Quarterly

2nd Quarter 2014

Decisions to roll over or transfer retirement plan or IRA assets

should be made with careful consideration of the advantages

and disadvantages, including investment options and

services, fees and expenses, withdrawal options, required

minimum distributions, tax treatment, and each individual’s

unique financial needs and retirement planning. Individuals

should consult with a professional tax advisor to discuss their

particular needs and goals before any decisions are made.

LIMIT ON IRA ROLLOVERS

Announcement 2014-15 addresses the application to

Individual Retirement Accounts and Individual Retirement

Annuities (collectively, “IRAs") of the one-rollover-per-year

limitation of § 408(d)(3)(B) of the Internal Revenue Code (IRC)

and provides transition relief for owners of IRAs.

IRC Section 408(d)(3)(A)(i) provides generally that any amount

distributed from an IRA will not be included in the gross

income of the distributee to the extent the amount is paid

into an IRA for the benefit of the distributee no later than 60

days after the distributee receives the distribution. Section

408(d)(3)(B) provides that an individual is permitted to make

only one rollover in any one-year period. Proposed Regulation

§ 1.408-4(b)(4)(ii) and IRS Publication 590, Individual

Retirement Arrangements (IRAs), state that this limitation is

applied on an IRA-by-IRA basis. However, a recent Tax Court

opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held

that the limitation applies on an aggregate basis, meaning

that an individual could not make an IRA-to-IRA rollover if he or

she had made such a rollover involving any of the individual’s

IRAs in the preceding one-year period. The IRS anticipates that

it will follow the interpretation of § 408(d)(3)(B) in Bobrow

and, accordingly, intends to withdraw the proposed regulation

and revise Publication 59 0 to the extent needed to follow this

interpretation. These actions by the IRS will not affect the

ability of an IRA owner to transfer funds from one IRA trustee

directly to another, because such a transfer is not a rollover

and, therefore, is not subject to the one-rollover-per-year

limitation of § 408(d)(3)(B). See Rev. Rul. 78-406, 1978-2

C.B. 157.

The IRS has received comments about the administrative

challenges presented by the Bobrow interpretation of § 408(d)

(3)(B). The IRS understands that adoption of the Tax Court’s

interpretation of the statute will require IRA custodians to

make changes in the processing of IRA rollovers and in IRA

disclosure documents, which will take time to implement.

Accordingly, the IRS will not apply the Bobrow interpretation of

§ 408(d)(3)(B) to any rollover that involves an IRA distribution

occurring before January 1, 2015. Regardless of the ultimate

resolution of the Bobrow case, the Treasury Department and

the IRS expect to issue a proposed regulation under § 408 that

would require the IRA rollover limitation apply on an aggregate

basis. However, in no event would the regulation be effective

before January 1, 2015.

History on Bobrow v. Commissioner

In 2008, Mr. Bobrow maintained two traditional IRAs (IRA 1 and

IRA 2) at Fidelity, his wife maintained a traditional IRA (IRA 3),

they maintained a joint checking account (Joint Account), and Mr.

Bobrow maintained an individual checking account (Individual

Account). Mr. Bobrow received two distributions from IRA 1

in the combined amount of $65,064 on April 14, 2008. Then,

on June 6, 2008, he received a $65,064 distribution from

IRA 2. On June 10, 2008, he transferred $65,064 from his

Individual Account to IRA 1. On July 31, 2008, Mrs. Bobrow

received $65,064 from IRA 3. On August 4, 2008, the couple

transferred $65,064 from their Joint Account to IRA 2. Finally,

on September, 30, 2008, Mrs. Bobrow transferred $40,000

from the Joint Account to IRA 3.

The dispute lies within two parts. The Commissioner

contends that the plain language of Section 408(d)(3)(B)

limits the frequency with which a taxpayer may elect to

make a nontaxable rollover contribution. By its terms, the

one-year limitation in Section 408(d)(3)(B) is not specific

to any single IRA maintained by an individual but instead

applies to all IRAs maintained by a taxpayer. As such, the

Commissioner also contends that two of the three repayments

are unqualified. The Bobrows maintained that the rollovers

were qualified based on a technical advice memo (Tech. Adv.

Mem. 9010007), instead of citing case law. Furthermore, the

items that were referenced relate to the use of funds between

the time a distribution was taken from the IRA and the time

repayment occurs. The Commissioner ruled that such defense

is irrelevant to determining whether a transaction qualifies as

a rollover contribution.

Conclusion

Again, the recent opinion (Memo 2014-21) regarding Bobrow

v. Commissioner puts an end to what has historically been an

acceptable strategy with IRA rollovers. Prior to this ruling, an

IRA owner was able to utilize the 60-day rollover rule per IRA.

After reviewing the Bobrows’ IRA transactions, the Tax Court

cited Revenue Code Section 408(d)(3)(B), which indicates

that an individual is permitted to make only one rollover in

any one-year period. And, in the latest Memo 2014-21, the

opinion holds that the limitation applies on an aggregate

basis, meaning that an individual could not make an IRA

rollover if he or she had made such a rollover involving any

of the individual’s IRAs in the preceding one-year period. An

individual may still complete a 60-day rollover; however, he

or she is purely limited to one per 365-day period, regardless

of the number of IRA accounts owned. Remember, this ruling

affects IRA to IRA rollovers, and it does not place a limit on the

number of direct rollovers from qualified retirement plans (i.e.,

401(k) or 403(b)) to IRAs.

QUALIFIED RETIREMENT PLAN

DISTRIBUTIONS ELIGIBLE FOR A ROLLOVER.

Retirement plans are all about saving, but at some point,

assets accumulated must be distributed. At the time of

distribution, funds may be rolled to an IRA or another qualified

plan in order to maintain the opportunity for tax-deferred

growth. But, will the distribution be eligible for a rollover.

One way to know if a distribution is an “eligible rollover

distribution" can be to see if it is on the list of distributions

that may not be rolled over. This list includes:

•

A Required Minimum Distribution: Paid in installments

based on life expectancy, these distributions must begin

by April 1 following the year the participant turns age 70 ½.

Plans may allow these distributions to be delayed until

retirement if the participant does not own more than 5%

of the sponsoring employer.

•

A distribution that is one of a series of substantially equal

periodic payments (at least annually) made over:

o

The life or life expectancy of the employee or over the

joint lives or joint life expectancy of the employee and

the employee’s beneficiary, or

o A specified period of ten or more years.

• A distribution made upon hardship.

•

After-tax contributions not payable to the name of the IRA

or retirement plan account.

•

Elective contributions (also called “deferrals") and

employee “after-tax" (not Roth) contributions that are

returned to the employee (together with their allocable

income) in order to comply with the annual contribution

limitations ($52,000 or $57,500, including a $5,500

“catch-up").

•

Corrective distributions of the following, including their

allocable income:

o

Excess contributions: Highly Compensated Employee

(HCE) deferrals that exceed the limits of the Actual

Deferral Percentage (ADP) test,

o

Excess deferrals: Deferrals that exceed the individual

limits of $17,500 or $23,000 (including a $5,500

“catch-up"), and

o

Excess aggregate contributions: HCE matching and/

or “after-tax" (not Roth) contributions that exceed the

limits of the Actual Contribution Percentage (ACP) test.

•

Participant loans in default that are deemed distributions.

•

Dividends paid on employee stock ownership plan (ESOP)

employer securities.

•

Distributions of premiums for accident or health

insurance.

•

The costs of current life insurance protection.

•

Prohibited allocations in S corporation ESOPs that are

treated as deemed distributions.

•

A distribution that is a permissible withdrawal from an

eligible automatic contribution arrangement.

When considering future distributions or when the time for

a distribution arises, the above list can help participants

determine whether the continuation of tax-deferred growth via

a rollover will be available.

PLAN DISTRIBUTIONS WHILE EMPLOYED.

Unbeknownst to many participants, their plan allows them to

take distributions from their profit sharing / 401(k) plan while

still employed, and they can elect to roll their assets to an IRA

(see Rollover considerations on page 1). However, whereas

the law allows for in-service distributions, as detailed in the

list below, the plan’s document must include the provisions

for them to be available.

In-service distribution opportunities vary per plan

contribution type, as noted below:

Profit Sharing Contributions

Contributed funds that have aged in the plan for at least

two years are eligible for a distribution, and all funds,

contributions and earnings, may be available for a

distribution after five years.

Elective Contributions (Deferrals)

Participant salary deferrals (pre-tax or Roth) are available for

distribution once the participant reaches age 59 ½.

Matching Contributions

Employer matching contributions generally have the same

availability as profit sharing contributions noted above.

However, qualified matching contributions (100% vested)

made to pass or avoid (via a Safe Harbor 401(k) plan) the ADP

Test have the same availability as employee deferrals noted

above.

Rollover Contributions

Funds that have been rolled into the plan from another

qualified plan or an IRA may be available for distribution

immediately or whenever desired by the participant.

When available, in-service distributions can offer additional

flexibility in financial planning. Participants should check

with their plan administrator to find out if in-service

distributions are available and if there are any plan-specific

limitations, for example, based on age or service.

ROLLOVERS TO QUALIFIED PLANS MADE

EASIER

The government is attempting to make it easier for

participants in qualified retirement plans to move their assets

from one employer’s plan to another. On April 3, 2014, the

IRS issued Revenue Ruling 2014-9 which provides a “safe

harbor" due diligence method of concluding whether or not a

check received is a rollover from a qualified plan. The ruling

also provides a safe harbor method of determining whether

a traditional IRA may be rolled into a qualified plan. In both

the case of the IRA and qualified plan, if there is no evidence

to the contrary, the plan administrator may use the new

procedures to reasonably and safely make the decision to

determine a rollover’s eligibility.

Previously, participants who wished to roll their accounts

into their new employer’s plan were sometimes required by

the new employer to get a letter from their prior employer

stating the assets were, in fact, coming from a qualified plan.

Since the two employers are almost always unrelated, this

often forces the participant to act as go-between for the two

companies. The process can become overly frustrating to the

participant and, in some cases, push them into taking a cash

distribution where there is no need to juggle the requirements

of two different employers.

The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but the accuracy of the information is not guaranteed.

This newsletter is distributed with the understanding that the publisher is not engaging in any legal or accounting type of work such as practicing law or CPA services.

Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifel.com

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The IRS ruling hopes to alleviate the burden on both

employers and participants by allowing the plan administrator

of the new plan to verify online the former plan’s qualified

status. The Department of Labor’s web site, www.efast.dol.gov,

contains electronic records of the Annual Return/Reports

of Employee Benefit Plans, more commonly known as the

Form 5500. Listed on the Form 5500 are codes that indicate

whether or not a plan is qualified. Specifically, if line 8a of the

Form 5500 does not include code “3C," which designates a

nonqualified plan under IRS Code Sections 401, 403, or 408,

the plan is deemed to be a qualified plan. This information is

publicly available and easily obtained by plan administrators

with web access.

One downside of this method is that certain plans are

not required to file 5500s such as specific governmental

retirement plans or individual 401(k) plans with assets of

less than $250,000. These plans would not show up in the

database, which would require the plan administrator to

get confirmation of the plan’s qualified status through the

traditional method of requiring the participant to produce a

letter from the prior employer.

Hoping to also ease the burden of rolling traditional IRAs

into qualified plans, the IRS provided some safe harbor

guidelines on IRA rollovers as well. In this situation, the

employee requests an IRA distribution and that the check is

made payable to the trustee of the new employer’s plan. The

employee receives the check and then delivers it to the plan

administrator of the new plan. At that point, the employee

must certify that there are no after-tax amounts included and

that he/she will not reach age 70 ½ by the end of the year that

the check is transferred in. If the check stub identifies the IRA

as the source of funds, the employer can reasonably conclude

that the distribution can be deposited into the qualified plan.

This process will not apply to rollovers from a Roth IRA, SIMPLE

IRA, or an inherited IRA.

While the new procedures will not work in all situations, such

as for rollovers from qualified plans that are not found in the

DOL’s database, this IRS ruling should help most participants

seeking to roll over their assets into a new qualified plan for

several reasons. One, the ruling eliminates the need for two

unrelated companies to communicate via the participant.

Two, it reduces the amount of paperwork necessary. Three, it

expedites the rollover process. And four, it decreases the time

that the retirement assets of the participant are out of market.

The IRS Revenue Ruling 2014-9 can be found at www.irs.gov/

pub/irs-drop/rr-14-09.pdf.