The IRS recently issued Notice 2014-54. What does it mean for our clients? This Notice is a regulatory change that will impact rollovers to IRAs.
Many people face the challenge of deciding to roll or not to roll. Sometimes people want to roll their 401(k) because they switched jobs. It can be uncomfortable leaving money with a former employer. Others feel they are limited by the 401(k) capabilities. The 401(k) plans often have restrictions upon when and how someone can take money out of the account. Rolling over to an IRA would give them more flexibility and greater access to investment options, as well as greater access to withdrawals from the account.
Planning for Your Heirs:
Many 401(k) plans force heirs to take the assets upon the death of the account owner. The alternative is to elect a tax-deferred distribution. This can be achieved through an IRA.[1]
Pre-tax investments, such as 401(k)s or traditional IRAs, allow you to postpone paying taxes on the amount you contribute and the earnings that are generated as long as they remain in the account. You pay taxes when you withdraw money from the account. After-tax contributions, such as Roth IRAs, are not tax‑deductible when you are saving, but tax‑free withdrawals can help reduce your total taxable income when you reach retirement.[2]
Notice 2014-54 is beneficial to taxpayers because they can now roll after-tax plan assets to a Roth IRA tax-free, and roll the pre-tax plan assets, including all earnings on the after-tax assets, to a traditional IRA.
The IRS also issued Notice 2014-15, stating that: beginning January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12‑month period, regardless of the number of IRAs you own. Although this may seem limiting, the one‑per year limit does not apply to: rollovers from traditional IRAs to Roth IRAs (conversions), trustee‑to‑trustee transfers to another IRA, IRA‑to‑plan rollovers, plan‑to‑IRA rollovers, plan‑to‑plan rollovers.[3] In other words, if you withdraw the money from your IRA and then within 60 days move it into your IRA (the same or a new IRA), then that is a rollover that can only be done one time with a 12-month period. Therefore, it should be very simple to avoid the application of this rule by making sure that the IRA or plan funds are never sent to you, but instead are transferred directly to the new IRA or plan.
[1]See https://www.kiplinger.com/article/retirement/T032‑C000‑S001‑should‑you‑roll‑over‑your‑401‑k‑to‑an‑ira.html.
[2]See https://www.ameriprise.com/retire/planning‑for‑retirement/retirement‑risks/pre‑tax‑investments.asp.
[3]See https://www.irs.gov/Retirement‑Plans/Plan‑Participant,‑Employee/Rollovers‑of‑Retirement‑Plan‑and‑IRA‑Distributions.