Thursday, January 22, 2009

2008 Changes to IRA Rules

On January 21, 2009, MarketWatch posted an excellent article by Robert Powell, entitled Keep Track of Your IRA, about the many significant rule changes made in 2008 affecting individual retirement accounts.

There were many new laws, court decisions, IRS notices and other rule changes affecting the retirement plan of choice for millions of Americans, according to Ed Slott, the nation's preeminent IRA expert. * * *
The article was also posted by Fox Business under the title "Don't Miss The Many New Rules Governing IRAs" (01/21/09).

The general features of an IRA are well-summarized on the AARP website.

The article first discussed the most significant changes in 2008, which were made by federal legislation:

By far, the biggest changes came as part of the Worker, Retiree, and Employer Recovery Act of 2008, or WRERA (which might be an acronym for "we're in big trouble").

Under that law, required minimum distributions for IRA owners, plan participants and beneficiaries are waived for 2009. Of note, you are still required to take your RMD if you turned 701/2 in 2008 but decided to wait until this year to take that distribution.

Another provision of WRERA: Starting in 2010, non-spouse beneficiaries aren't allowed to leave retirement plans with the former IRA owner's employer. They will have to transfer those plans to an IRA at a bank, brokerage or mutual-fund firm.

Under the Emergency Economic Stabilization Act of 2008, sometimes called the bailout bill, IRA owners who are 701/2 can transfer up to $100,000 to a charity in 2009 without having the amount included in their gross income.* * * [Links added.]
The article then highlighted, under headings, additional changes regarding IRAs, from which I derive a bullet-point Tip:
  • Court decisions -- Tip: "According to Goldberg, the lesson learned is this: Don't designate a revocable trust as the IRA beneficiary. Instead, name an irrevocable discretionary trust with spendthrift language as the beneficiary, he said."
  • IRS takes note of Roth conversions -- Tip: Starting in 2010, plans must allow . . . a non-spouse beneficiary of a qualified retirement plan to transfer the account to an inherited Roth IRA so long as the transfer is allowed by the plan and the beneficiary meets the Roth conversion eligibility requirements.
  • Saving the 'stretch' IRA -- Tip: The IRS ruled in two cases that, where the custodian was at fault in failing to make a required annual distribution and then did a make-up distribution, the IRA owner didn't have to pay the 10% penalty on the early distributions.
  • Identifying the beneficiary -- Tip: "Make sure your beneficiary or beneficiaries are 'readily identifiable.'"
  • Rules on disclaimers -- Tip: "Suffice to say: If you plan to disclaim IRAs, make sure you talk to a qualified professional."
  • IRA trust rulings -- Tip: "If you have a beneficiary who's a minor, it's best to designate 'a custodian or a trust to hold an inherited IRA for the minor' rather than have to ask for a ruling later."
  • What the future holds -- Tip: "The only certainty is that that there will be a list next year, too."
The article did not mention another development in 2008 that could affect self-trusteed IRAs held with one particular custodian, as described in a New York Daily News article posted November 16, 2008, entitled "Accessing your IRA is easy with new Entrust Group debit card" by Phyllis Furman.
Tapping into your retirement savings is just one swipe away.

You may have heard of the 401(k) card, the debit card that makes borrowing from your 401(k) plan as easy as heading to an ATM. Now its cousin is coming to the market: the IRA Card.

This latest piece of plastic offering quickie access to your retirement funds is from the Entrust Group, an administrator of self-directed Individual Retirement Accounts.

The card, which launches Monday, lets you draw from your IRA savings and do other things like change investment allocations within your account, in a flash.

To get started, you set up an IRA checking account with a minimum deposit of $1,000. You can then tap into those funds with the IRA Debit card - which is co-branded with Visa - or with IRA Card checks. * * *
The article mentions one criticism of the new access card:
But critics of products like the IRA Card and 401(k) cards warn they can be dangerous because they allow you to quickly tap into funds that should be locked away and growing for your retirement. * * *
Remember too, the IRS will evaluate any distributions made under such an IRA access card, whether casual or intentional, under its very strict taxation rules.