IRS Clarifies One-Per-Year Limit on Tax-Free Rollovers

The Internal Revenue Service issued guidance clarifying the impact a 2014 individual retirement account (IRA) rollover has on the pending one-per-year limit imposed on tax-free rollovers.

The clarification relates to a change, announced by the IRS earlier this year, in the way the statutory one-per-year limit applies to rollovers between IRAs. The change reflects an interpretation by the U.S. Tax Court in a January 2014 decision (Bobrow v. Commissioner) applying the limit to preclude an individual from making more than one tax-free rollover in any one-year period, even if the rollovers involve different IRAs.

Before 2015, the one-per-year limit applies only on an “IRA-by-IRA” basis, the IRS explains. That is, only two or more rollovers involving the same IRA will trigger a violation. Beginning in 2015, however, the limit will apply by aggregating all of an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.

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To help taxpayers by allowing time for transition to the new interpretation, the IRS announced shortly after the initial January 2014 Tax Court decision that the new interpretation would not apply before January 1, 2015.

In Announcement 2014-32, posted November 10 on IRS.gov, the IRS makes clear that the new interpretation will apply beginning January 1, 2015. The IRS says that a distribution from an IRA received during 2014 and properly rolled over (normally within 60 days) to another IRA will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual. This will give IRA owners a “fresh start” in 2015 when applying the one-per-year rollover limit to multiple IRAs, the IRS says.

Although an eligible IRA distribution received on or after January 1, 2015, and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. As the supplementary guidance states, a rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the one-year period between the individual’s traditional IRAs, and vice versa. 

As before, Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers—i.e., direct transfers of assets from one IRA trustee to another—are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.

More information on the rule change can be found on www.IRS.gov by typing typing “IRA” in the search box, according to the IRS.

Paper Advocates for Wider Use of Longevity Annuities

Longevity annuities could help many individuals use their retirement assets most effectively to achieve financial security, according to a new paper.

In “Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities,” released by the Retirement Security Project at the Brookings Institution University of Maryland Professor and former Council of Economic Adviser Member Katherine Abraham and Brookings Fellow Benjamin Harris note that the longstanding shift from employer-provided pensions to account-type saving plans has left workers with trillions in financial assets, but without adequate products for achieving retirement security. Longevity annuities—deferred income annuities that offer a monthly benefit beginning at some relatively advanced age and function as an insurance product—cost less than conventional annuities but offer the same pay-outs, and should be a viable retirement option, they write.

Longevity annuities either can markedly improve retirement wellbeing or have the promise to do so if the market becomes slightly more competitive, they find, suggesting ways to improve take-up of these products by addressing obstacles to consumer participation, employer participation and insurance company participation. The longevity annuity market has been under-developed because few plans are offered by employers due to concerns about fiduciary responsibility, it is rare for workers to choose to buy them outside of the workplace, insurance companies have concerns about mortality risk, the elderly have challenges with financially literacy and often do not get good investment advice, there are fears of the long-run viability of life insurers, and consumers do not account adequately for the risk of outliving their retirement savings.

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The authors review data from the Health and Retirement Survey to find that individuals do not do a very good job of predicting their lifespan, with actual survival rates exceeding the anticipated probability of survival—sometimes by a wide margin. Roughly half of those who predicted that they had no chance of living to 75 actually did, and even among the groups who thought they had a 40% to 50% chance of living to age 75, the share actually surviving to that age was considerably larger (69% and 75%, respectively). This under-predicting of the risk of outliving one’s retirement may lead to diminished consumer demand, Abraham and Harris believe.

The authors note that the use of automatic enrollment in retirement plans has helped increase retirement security, which could be a useful tool for expanding longevity annuities. Policymakers are looking to expand retirement savings to those beyond those who only have access through their employers, which could help some 23 to 43 million more Americans save for retirement. They also point out that recent regulations have lowered the barrier to these products by easing restrictions on purchasing a longevity annuity from retirement accounts. Consumer fear of life insurers’ inability to pay out due to future solvency is not borne out by recent history, they find, but this stability is not well-understood in part due to restrictions on insurers advertising insolvency safeguards.

The authors suggest steps to increase the use of these products:

Educating consumers:

  • Creating a set of government guidelines aimed at helping older Americans make sound financial decisions such as a financial security graphic, similar to the food pyramid, which could be disseminated by a reputable government agency such as the Consumer Financial Protection Bureau or the Social Security Administration;
  • Product certification, including extending preferential tax treatment to certified products;
  • Allowing insurance companies to advertise the state guarantee; and
  • Offering longevity annuities to government workers via their Thrift Savings Accounts or through 401(k)s.

 

Increasing employer participation:

Reform Department of Labor rules so that plan sponsors can easily verify the soundness of insurers offering longevity annuities.

 

Increasing insurer participation:

  • To help firms hedge against risk related to demographic trends, U.S. Treasury could issue bonds indexed to aggregate mortality trends; and
  • A government agency such as Social Security could produce an official mortality index on which private-sector longevity bonds could be based.

 

“Longevity annuities [could] play a useful role in a retirement landscape increasingly dominated by defined contribution accounts. We are optimistic that longevity annuities can significantly increase expected lifetime well-being for middle- and upper-income retirees who have substantial financial assets at the time of retirement. An array of public policies, including policies aimed at consumers, employers and insurers, can help better support this nascent market. In particular, the combination of improved consumer awareness, reduced barriers to employer-based accounts, and better risk management strategies for insurers could go a long way toward turning longevity annuities into a mainstream product for retirees,” the paper authors conclude.

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