IRA Rollovers; Getting Ready for Change

This article originally ran on May 9, 2014.

By Ellie Lowder, TGPC, Consultant

Effective on Jan. 1, 2015, change is coming to the “once each 12 months” rule for indirect IRA-to-IRA rollovers. In federal Tax Court, Bobrow vs. Commissioner of Internal Revenue Service, the long-followed rule that indirect IRA-to-IRA rollovers were limited to once each 12-month period per IRA was struck down. Instead, the court held that you can’t make a non-taxable rollover from one IRA to another if you have already made a rollover from any IRA that you own.

The IRS, in Announcement 2014-15, signaled their intent to follow the court’s ruling; however, it will apply the rollover rule to distributions that take place on and after Jan. 1, 2015. This will give the IRS time to work with Prop. Treas. Reg. §1.408-4(b)(4)(ii), and revise Publication 590, both of which apply the one-a-year rollover rule to each IRA a single individual owns.

It is important to note that direct trustee-to-trustee transfers of one IRA to another can take place as many times as the IRA owner desires—. The new limitation applies ONLY to indirect rollovers from one IRA to another.

FINRA Announces Enforcement Activity in 2014

In Regulatory Notice 13-35, issued in December 2013, FINRA announced that in 2014, it would focus on rollover activity from employer-sponsored plans to IRAs, citing broker/dealer obligations in meeting compliance requirements in the discussion of rollovers from employer-sponsored plans to IRAs. The SEC, in its 2014 Examination Priorities, also signaled intent to examine the sales practices of investment advisors who focus on retirees and the rollover of their plan assets to IRAs, as well as the marketing and advertising of IRA rollovers by broker/dealers and investment advisors. Additionally, we are told that the Department of Labor is expected to re-propose the regulation defining fiduciary investment advice before the end of 2014.

The FINRA notice makes it clear that their enforcement activity will extend well beyond suitable securities recommendations for IRA rollovers to whether the rollover itself is appropriate. As an example, the FINRA notice points out that penalty free withdrawals are available as early as age 55 in an employer-sponsored plan, while not available until age 59½ in an IRA and that loans may be available in the employer’s plan, but NOT in an IRA.. Additionally, the notice points out that fees and expenses may be lower in the employer-sponsored plan than in the IRA (and, that the plan sponsor may be paying some of those fees).

Broker/dealers will want to carefully review their compliance practices in light of Notice 13-35, and engage in additional training of their registered representatives as needed.