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[Guidance Overview] Proposed IRS Regs Would Update and Clarify the Penalty for Nondisclosure of Reportable Transactions
"The proposed regulations ... clarify the phrase 'decrease in tax' [1] as reflecting the difference between the amount of tax reported on the filed return and a hypothetical return without the reportable transaction, taking into account 'adjustments that result mechanically from backing out the reportable transaction' and [2] as including 'any other tax that results from participation in the reportable transaction but was not reported on the taxpayer's return,' such as an excise tax on excess individual retirement account contributions." (The Tax Adviser)
Some Variable Annuities Could Disappear From IRAs
"Variable annuities (VAs) with no income guarantees will 'probably be eliminated' from [IRAs] under the [DOL's] proposed conflict of interest rule, [Ryan Krueger, head of U.S. life insurance research for Keefe, Bruyette & Woods] said.... 'We'll take a look at it, we'll adjust, we'll adapt, we'll find a path forward and ... I really believe that what's going to continue to happen is market share is going to continue to move from second- and third-tier providers to first-tier providers,' said Larry D. Zimpleman, chairman and CEO of Principal Financial." (
[Official Guidance] Text of IRS Proposed Regs: Reportable Transactions Penalties under Section 6707A
"This document contains proposed regulations that provide guidance regarding the amount of the penalty under section 6707A ... for failure to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction. The proposed regulations are necessary to clarify the amount of the penalty under section 6707A, as amended by the Small Business Jobs Act of 2010. The proposed regulations would affect any taxpayer who fails to properly disclose participation in a reportable transaction." (Internal Revenue Service [IRS])
Roth Conversion in Market Downturn: Heads You Win, Tails The Government Loses!
"When you execute a Roth IRA conversion, you pay tax on the fair market value of the assets that you convert. A few weeks ago, your IRA may have been worth $100,000, so converting it completely would have added another $100,000 to your income tax bill. Now, however, that account may be worth only $80,000. As a result, converting now as opposed to two weeks ago could save you about 20% on your tax bill." (Slott Report)
Post-Employment 401(k) Rollovers: Questions HR Should Ask
"Before the DOL issues its final rule, now may be an ideal time for plan sponsors to more formally review their position regarding terminated plan participants.... [T]here are three questions in particular that sponsors may want to address ... [1] What currently happens when a plan participant terminates from service? ... [2] What is the plan sponsor's preference regarding whether terminated participants leave their money behind in the plan or roll their balances to a new plan or IRA? ... [3] Are the plan design and employee education offerings currently aligned with the company's goals?" (Society for Human Resource Management [SHRM])
[Guidance Overview] Recent IRS Guidance on Plan (and IRA) Distributions (PDF)
"Participants and plan sponsors should be aware that the IRS recently issued several pieces of guidance affecting qualified plans and IRA distributions. First, the IRS issued Notice 2014-54, which provides favorable guidance on plan distributions to multiple destinations. It allows a participant to directly roll over pre-tax funds to a traditional IRA, while taking the after-tax or Roth amounts in cash (or rolling to a Roth IRA). Second, the IRS issued Notice 2014-74, which replaces the existing safe harbor rollover notices set forth in Notice 2009-68. Third, the IRS issued Announcement 2014-32, that imposes an aggregate one-per-year rule for all indirect rollovers between IRAs following the surprising Tax Court decision in Bobrow v. Comm'r. [This article takes] a closer look at each in turn[.]" (Groom Law Group)
How Rolling Over Your 401(k) to an IRA Can Increase Your Tax Bill
"[O]ne trap you can step into with regards to the Back-Door Roth IRA strategy -- or any Roth IRA conversion for that matter -- is when you 'cross streams' by rolling plan money into an IRA in the same year you make a Roth IRA conversion.... If you convert the entire IRA, you will not owe any tax, since the plan assets are excluded from the IRA pro-rata formula, and your IRA was all after-tax money.... [L]et's say you change jobs mid-year. Believing you'd be better off in an IRA than with your 401(k), you roll your 401(k) to an IRA. Bang! You just increased your tax bill for the year by several thousand dollars." (Slott Report)
IRA Required Minimum Distribution Worksheet: Younger Spouse as Beneficiary (PDF)
"If your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you, use this worksheet to calculate this year's required withdrawal for your traditional IRA." (Internal Revenue Service [IRS])
IRA Required Minimum Distribution Worksheet (PDF)
"IRA Required Minimum Distribution Worksheet: Use this worksheet to figure this year's required withdrawal for your traditional IRA unless your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you." (Internal Revenue Service [IRS])
Making a 'Backdoor' Roth IRA Contribution While Avoiding the IRA Aggregation Rule and the Step Transaction Doctrine
"Perhaps the greatest caveat to the backdoor Roth contribution strategy, though, is the so-called 'step transaction doctrine', which allows the Tax Court to recognize that even if the individual contribution-and-conversion steps are legal, doing them all together in an integrated transaction is still an impermissible Roth contribution for high-income individuals to which the 6% excess contribution penalty tax may apply. Fortunately, though, the step transaction doctrine can be navigated, by allowing time to pass between the contribution and subsequent conversion ... But perhaps the easiest way to avoid the step transaction doctrine is also the simplest ... stop calling it a backdoor Roth contribution in the first place!" (Michael Kitces in Nerd's Eye View)
How NOT to Invest in an Alternative Investment in Your IRA
"The IRA owner wanted to invest his IRA funds in a note, the debt of an unrelated party.... [He] took distributions from two of his IRAs and threw in $100,000 of his own money and closed on the note.... [He] ends up with only one note ... titled in the name of his IRA.... What are his problems? ... [1] Titling an asset in the name of your IRA does not make it an IRA asset. Only an IRA custodian can hold an IRA asset. He cannot move the note into an IRA. [2] When you take a distribution of cash from an IRA it can only be replaced with cash. You must rollover what you took out. [3] Because of the IRA one-rollover-per-year rule, he can only rollover one of his distributions." (Slott Report)
[Guidance Overview] Salvaging the Benefits of a Spousal Rollover When the Beneficiary Designation Is Wrong
"Two recent private rulings confirm ... that a spousal rollover often can be salvaged even when the decedent did not properly designate the spouse as beneficiary. The IRS will still allow a rollover if the spouse can dictate all the actions necessary to cause the account to be paid to him or her." (Schiff Hardin)
Hearings on Proposed Conflict of Interest Regs Kick Off in Washington
"There is perhaps no better venue than a marathon Labor Department hearing to show what practices and beliefs most divide an industry.... Marilyn Mohrman-Gillis, CFP Board managing director of public policy and communications ... argued against the common industry conjecture that the new fiduciary rule, as written, would severely challenge the commissioned-based broker/dealer business model and force advisers into fee-based models that will be may be more expensive for consumers.... Citing figures from the U.K., where related conflict of interest rulemaking was debated and adopted, [Nick Lane, chairman of the board of directors for the Insured Retirement Institute] predicted up to 25% of advisers 'could leave the industry within the first year of implementation of this rule.' " (PLANSPONSOR)
An Analysis of Variable Annuity Surrender Fees (PDF)
"For this sample of contracts, the average surrender fee paid on any withdrawal is less than 1% of the surrendered amount. The median surrender fee paid as a percentage of the amount withdrawn was zero. The account at the 75th percentile also paid zero surrender fees. The average surrender charge on any surrender (partial or full) is 0.8%.... Of the accounts with surrenders, approximately ... 70% are IRA accounts." (American Council of Life Insurers [ACLI])
Even Casual Conversations Might Trigger Application of Fiduciary Rule to Fixed Annuity Advisors
"When agents talk to clients about fixed annuities, it's a bit like a first or second date. The conversation, filled with highs and lows and fast and slows and ebbs and flows, sometimes moves quickly and at other times lurches to a halt. But now the DOL is asking agents to sign the equivalent of a prenup outlining the parameters of the fiduciary responsibility and where commissions are coming from. For sellers of fixed annuities ... this isn't how annuity conversations take place. Agents don't sit across the table and robotically run through their clients' 'financial Miranda' rights." (
New ACL Program to Improve Education and Financial Literacy Regarding Rollover of Retirement Accounts
"ACL's National Resource Center on Women and Retirement Planning -- operated by the Women's Institute for Secure Retirement (WISER) -- is partnering with the Retirement Clearinghouse (RCH) on a pilot to effectively reach and educate low- and moderate-income workers about the importance of rolling over their retirement savings in order to prevent adverse consequences common in today's mobile workforce. RCH has the means and technology to automatically transfer small plan balances from a worker's current plan into their next employer plan.... If fully taken to scale, it is estimated to keep over $1 trillion in retirement accounts for American workers over the next ten years." (Administration for Community Living)
Market Gains Drive Retirement Balances Higher But Too Much Stock Could Put Savings at Risk
"While a rising stock market is one reason the average 401(k) balance is up 50 percent in the last five years, this has led to an increased percentage of equities within many 401(k) accounts, which can add increased exposure to the negative impact of a market downturn.... 18 percent of people 50-54 had a stock allocation at least 10 percentage points or higher than recommended, and for people ages 55-59, that figure increased to 27 percent. An additional 11 percent of people ages 50-54 had 100 percent of their 401(k) assets in stocks, while 10 percent of people ages 55-59 had all of their 401(k) assets in stocks." (Fidelity)
How Safe from Creditors Is Your 401(k) Money If You Roll It to an IRA?
"What happens ... if you move those ERISA-protected 401(k) funds to an IRA? Does the protection you had in your 401(k) follow along? Here's where it can start to get a little complicated, because we actually have to split out your creditor protection into two distinct categories: creditor protection in bankruptcy and creditor protection in a non-bankruptcy event." (Slott Report)
Roth IRA Investors' Activity, 2007-2013 (PDF)
88 pages. "First available in 1998, Roth individual retirement accounts (IRAs) had accumulated more than $500 billion in assets by year-end 2014.... Forty-five percent of consistent Roth IRA investors aged 24 or older in 2013 contributed to their Roth IRAs between tax year 2008 and tax year 2013, and more than three-quarters of them contributed in multiple year ... Roth IRA investors tend to be younger than traditional IRA investors. At year-end 2013, 31 percent of Roth IRA investors were younger than 40, compared with 15 percent of traditional IRA investors. Only 24 percent of Roth IRA investors were 60 or older, compared with 38 percent of traditional IRA investors. This younger age distribution reflects the rules governing access to Roth IRAs, including income limits on contributions and (until 2010) on conversions, as well as the historically limited scope for rollover activity." (Investment Company Institute [ICI])
What to Do If You Discover You Weren't Eligible to Make That 2015 Roth IRA Contribution
"First and foremost, you will have to remove the funds from the Roth IRA. You have three options. Recharacterization ... Excess contribution ... Carry forward." (Slott Report)
[Guidance Overview] Reminder: One-Rollover-Per-Year Rule for IRAs Began in 2015
"[B]eginning this year, 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.... The one-rollover-per-year limitation is applied by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit." (EisnerAmper)
Dealing with Foreign Persons and Retirement Accounts in the Global Economy
"[F]oreign beneficiaries have the same options as any other beneficiary. They can stretch distributions or take a distribution in full. Spouse beneficiaries can move inherited funds into an IRA in their own name. What account owners and beneficiaries cannot do is move foreign retirement accounts to U.S. retirement accounts and vice versa." (Slott Report)
Deathbed Roth Conversions and the IRD Deduction
"[W]hile the [income in respect of a decedent (IRD)] deduction does shelter against Federal estate taxes, deathbed Roth conversions can still be relevant to protect against state estate taxes. Though in either case, the greatest driver of the outcome is not actually the IRD deduction or minimizing state estate taxes at all, but trying to shift the timing of when the IRA is recognized for tax purposes, so that the income taxes are paid at whichever rate is lower -- either the IRA owner now, or the rate the beneficiaries would pay by simply inheriting the pre-tax IRA and stretching it out in the future!" (Michael Kitces in Nerd's Eye View)
IRA Withdrawals in 2013 and Longitudinal Results, 2010-2013 (PDF)
"Just over 22 percent of individuals who owned a Traditional or Roth [IRA] took a withdrawal in 2013. The overall IRA withdrawal percentage was largely driven by activity among individuals ages 70-1/2 or older owning a Traditional IRA ... [A]mong individuals under age 60, 10 percent or fewer had a withdrawal. For those at the RMD age, the withdrawal rates at the median appeared close to the amount that was required to be withdrawn, though some were significantly more.... Among those ages 70 or older, withdrawal rates over a four-year period showed that most individuals were withdrawing at a rate that was likely to be able to sustain some level of post-retirement income from IRAs as the individual continued to age." (Employee Benefit Research Institute [EBRI])
Treasury Inspector General Report: IRS Should Notify and Educate Taxpayers About Required Minimum Distributions from IRAs
"TIGTA recommended ... [1] directly communicating with taxpayers required to take a distribution and informing them about the distribution rules, using easily understood language; and [2] if the notice program is expanded, modifying the methodology for the required minimum distribution notices to identify additional noncompliant individuals.... IRS officials partially agreed ... However, due to budget limitations, the IRS is not expanding its use of notices. In addition, the IRS agreed that direct communication with taxpayers reaching the age of 70-1/2 would be helpful, but it is not implementing this program due to budget constraints. The IRS did not agree to inform estates of distribution rules associated with IRA inheritances." [Dated May 29, 2015; released July 15, 2015.] (Treasury Inspector General for Tax Administration [TIGTA])
Investor Activity in Traditional IRAs, 2007-2013 (PDF)
76 pages. "Despite dramatic declines in stock values between October 2007 and March 2009, a recession (December 2007 to June 2009), and rising unemployment rates, traditional IRA investors with accounts from year-end 2007 through year-end 2013 showed little reaction to the financial events.... Traditional IRA investors' allocation to equity holdings fell, on average, although some of the change merely reflects market movement rather than investors' rebalancing.... Although account balances fell considerably following the stock market decline in 2008, the average traditional IRA balance for traditional IRA investors aged 25 to 69 with account balances in all years between 2007 and 2013 was significantly higher at year-end 2013 than at year-end 2007." (Investment Company Institute [ICI])
Nibbling at Roth Conversions
"Since few want to swallow the elephant all at once, yet ownership of a Roth IRA is highly desirable, we must help clients look for ways to take small bites: ... Here are examples of the types of planning opportunities we should keep an eye out for: The 'backdoor' Roth conversion.... Use up temporary losses, deductions, AMT brackets.... Direct aftertax plan distributions to a Roth IRA.... Contribute to a Roth rather than a deductible traditional IRA.... Convert enough to reach, but not exceed, the next income tax bracket.... Convert to avoid expected future higher tax rates.... Don't forget state taxes! ... What else are you going to spend the money on?" (Morningstar Advisor)
[Guidance Overview] IRS Retirement News for Employers, July 6, 2015
Topics: [1] IRS Nationwide Tax Forums session on SEP and SIMPLE IRA plans; [2] Form 5500 series: Changes to Forms 5500 for 2014, Penalty Relief Program for Form 5500-EZ Late Filers; [3] Correcting plans: Use participants' correct compensation, Revised procedures, Sponsoring a 403(b) plan, and New lower fees; [4] Retirement savings tips: Mid-year retirement savings check-up, and How to take responsibility for your retirement. (Internal Revenue Service [IRS])
The Threat to Small Business Retirement Savings
Infographic. "Stretching its current regulatory authority over employer-provided retirement plans, the [DOL has] proposed ... a new regulatory package that would put DOL in charge of financial advice provided to all [IRAs] as well as to all private-sector, employer-provided retirement plans. This regulatory expansion would change the rules governing how financial advice is provided to roughly $15 trillion in retirement savings ... Unsurprisingly, this kind of sweeping change would result in a lot of unintended consequences." (U.S. Chamber of Commerce)
[Guidance Overview] Fiduciary Advice Proposal Signals a Fundamental Shift in DOL's Regulatory Method (PDF)
"The DOL's fiduciary proposal represents a fundamental shift in the Department's approach to regulating the retirement services industry... [T]he Department has chosen to reformulate the definition of fiduciary to encompass numerous types of sales activities that are clearly non-fiduciary in nature under current law.... The 'principles-based' approach utilized in [the best-interests contract] exemption may be a model for how the DOL sees the 'next generation' of class exemptions... And finally, the proposal represents a dramatic shift by the Department toward the regulation of the IRA rollover marketplace." (Groom Law Group)
Retirement Assets Total $24.9 Trillion in First Quarter 2015
"Retirement assets accounted for 36 percent of all household financial assets in the United States at the end of the first quarter of 2015.... Assets in individual retirement accounts (IRAs) totaled $7.6 trillion at the end of the first quarter of 2015, an increase of 2.1 percent from the end of the fourth quarter. Defined contribution (DC) plan assets rose 1.8 percent in the first quarter to $6.8 trillion. Government defined benefit (DB) plans-- including federal, state, and local government plans -- held $5.1 trillion in assets as of the end of March, a 0.5 percent decrease from the end of December. Private-sector DB plans held $3.2 trillion in assets at the end of the first quarter of 2015[.]" (Investment Company Institute [ICI])
[Guidance Overview] Summary of DOL Regulatory Package Redefining Fiduciary Advice and Proposing or Amending Prohibited Transaction Class Exemptions (PDF)
6 pages. "There is still a considerable amount of debate over the meaning and impact of the Proposal, and a key area of uncertainty is exactly how the rollover provisions in the proposal are intended to operate. As a high-level summary, this [article] does not address all of the literally hundreds of issues being discussed, but it does provide a general overview of the expanded definition and the key prohibited transaction class exemption, the Best Interest Contract Exemption (BICE)." (U.S. Chamber of Commerce)
[Guidance Overview] Beneficiaries Need to Understand the 'Income in Respect of a Decedent' Deduction
"[T]he Internal Revenue Code allows for an 'Income in Respect of a Decedent' (IRD) deduction under Section 691(c). Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material -- as much as 40% of the value of the account! Yet despite its size, beneficiaries in practice often 'miss' the IRD deduction ... And notably, in the end the IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more!" (Michael Kitces in Nerd's Eye View)
[Opinion] Dear 'Financial Consultant': Do You Really Act in My 'Best Interests'?
['Conflict of interest' questions, in the form of a letter to a financial consultant.] "Can you answer these questions for me? Also, can you put your answers in writing? ... [1] Do you possess the legal obligation to act in my 'best interests'? ... [2] With respect to each conflict of interest you may possess ... please explain to me how you have, in the past, ensured that you have observed [listed] procedures to properly manage each conflict of interest in order to ensure that no harm comes to me: ... [3] With respect to each conflict of interest you may possess ... is each transaction you recommended that I undertake ... also 'substantively fair' to me, as is required under a true fiduciary 'best interests' standard? ... [4] What are the total fees and costs associated with each investment product I have purchased as a result of your recommendations.... [5] Please set forth the compensation received by your firm as a result of any recommendation from you which I have implemented.... [6] Please also set forth whether you received any material compensation as a result of your recommendations to me." (Ron Rhoades)
[Opinion] Statement from Rep. Roe at HELP Subcommittee Hearing on Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees
"[We] cannot -- in any way -- make it harder for workers, retirees, and small business owners to receive the financial advice they may need. Yet that is precisely what this regulatory proposal would do. Offering some of the most basic assistance would be prohibited, such as advice on rolling over funds from a 401(k) to an IRA. Financial advisors would no longer be able to assist individuals in how to manage their funds upon retirement. And small business owners would be denied help in selecting the right investment options for their workforce, which will lead to fewer employees enrolled in a retirement plan." (Committee on Education and the Workforce, U.S. House of Representatives)
[Opinion] Perez's Perilous Costs: Eye-Catching Numbers DOL Is Ignoring with Fiduciary Proposal
"Small business owners, through SEP and SIMPLE-type IRA plans, provide roughly $472 billion in retirement savings to their employees. But DOL's proposal does not treat small business retirement plans the same relative to large employer plans, putting them at a disadvantage and making it harder for small business owners to do the right thing for their employees.... Because DOL has included advisors to small businesses in its fiduciary definition, many small business employees trying to save for retirement will no longer enjoy access to low-cost investment assistance.... DOL itself has estimated that access to professional investment advice saves more than $100 billion per year in preventable financial mistakes. That is more than five times the amount that DOL says it will save people by finalizing its new regulation." (U.S. Chamber of Commerce)
Auto-IRAs: How Much Would They Increase the Probability of 'Successful' Retirements and Decrease Retirement Deficits?
"Assuming no opt-outs, this analysis finds that the introduction of an auto-IRA for households currently ages 35-39 working for small employers, would increase the probability of a 'successful' retirement (as measured by the Retirement Readiness Ratings, or RRR) by 8.4 percent, declining as employer size increases. Even in the worst-case scenario (75 percent opt out) there was an increase in RRR, albeit only 2.2 percent for those working for small employers and 1.1 percent for those with large employers." (Employee Benefit Research Institute [EBRI])
Using Your IRA to Buy a Business: Still a Risky Strategy
"The court said that the wages could not be justified as reasonable compensation, which is an exception to the prohibited transaction rules, because the reasonable compensation exception is available only for services performed for the IRA or qualified plan. In this case, the services were performed for the business, not for the IRA itself, so the exception did not apply. Note that the salary amounts were modest ($9,754 in 2005 and $29,263 in 2006); it was the act of directing the salary payments, not the amount of those payments, that was the prohibited transaction." [Ellis v. Comm'r of Internal Revenue, No. 14-1310 (8th Cir. June 5, 2015)] (Stinson Leonard Street)
[Official Guidance] Text of DOL Notice of Hearing and Extension of Comment Period for Proposed Conflict of Interest (Fiduciary) Regs and Prohibited Transaction Exemptions
"Notice is hereby given that [EBSA] will hold a public hearing on August 10, 11, and 12, and continuing through August 13, 2015 (if necessary) to consider issues attendant to adopting a regulation concerning its proposed conflict of interest rule and related proposed prohibited transaction exemptions. The Department also is extending the date by which comments may be submitted on the proposed rule and proposed new and amended exemptions. Public comments on the proposals may now be submitted to the Department on or before July 21, 2015." (Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL])
[Opinion] AARP's David Certner on DOL's Proposed Fiduciary Rule: 'Disclosure Alone Not Enough'
"Given the confusion and lack of understanding in the marketplace, it is clear that disclosure alone is not enough.... The current rules were basically adopted before individual account plans like 401k-type plans and IRAs were in existence. Most Americans with retirement savings now rely on individual account plans, and therefore the responsibility for investing the plan assets falls on the individual. The rules must be updated to respond to this change, and to ensure that all retirement plan advisers act in the 'best interest' of the individual investor. Failure to act will continue to cost Americans billions of dollars each year out of their retirement savings -- money that they cannot afford to lose." (Fiduciary News)
Money Flows Out of 401(k) Plans as Baby Boomers Age
"Withdrawals from 401(k) plans are now exceeding new contributions as baby boomers age, a shift that could have profound implications for the U.S. retirement industry. Investors pulled a net $11.4 billion from tax-deferred savings plans in 2013 ... ending decades of expansion.... The movement out of 401(k)s is expected to accelerate in the coming decade as more baby boomers retire, squeezing large money-management firms that rely on fees charged to employers and investors as a chief profit engine ... Asset managers hope they can replace the outflows with a new surge from millennials ... One industry data provider said most funds leaving 401(k)-style plans are migrating to IRAs." (The Wall Street Journal; subscription may be required)
A Way Around the Once-per-Year Restriction on IRA Rollovers
"[B]egin by taking money out of [the] IRA ... But rather than putting $50,000 back into the IRA within 60 days, this client would create a Roth IRA and fund the new account with $50,000.... [T]he final step is to recharacterize that conversion on or before the due date of the tax return for the year of the conversion. That effectively undoes the Roth conversation and transfers the $50,000 (plus any growth accumulated during that year) back into the traditional IRA. From a tax perspective, it is as if the money never left the account." (The Wall Street Journal; subscription may be required)
Are Your Investment Fees Deductible?
"With the rise of comprehensive wealth management, it is increasingly common for clients to pay a single bundled AUM fee that covers not only deductible investment management services but also non-deductible planning expenses. Technically, though, those clients should probably only be deducting a portion of the AUM fee, not the entire amount -- at least where the AUM fee covers a material amount of planning services. The issue is especially concerning when it comes to retirement accounts such as IRAs, where paying a personal financial planning fee with retirement assets could trigger a taxable deemed distribution, or even disqualify the entire IRA as a prohibited transaction.... [F]or some firms, unbundling fees can present challenges in communicating the value of their services." (On Wall Street)
Text of Eighth Circuit Opinion Affirming Disqualification of IRA to Used to Fund Business Startup; Taxpayer Owes Ordinary Income Tax on Entire Amount (PDF)
"[A]n attorney for Mr. Ellis formed CST Investments, LLC (CST), to engage in the business of used automobile sales ... The operating agreement contemplated that Mr. Ellis's IRA would provide an initial capital contribution of $319,500 in exchange for a 98 percent ownership in CST ... Mr. Ellis's IRA did not exist at the time CST was formed.... [H]e received [the funds] from a 401(k) that he had established with his previous employer, and he deposited the amount in his IRA.... To compensate him for his services as general manager, CST paid Mr. Ellis a salary of $9,754 in 2005 and $29,263 in 2006.... If a disqualified person engages in a prohibited transaction with an IRA, the plan loses its status as an individual retirement account under Section 408(a), and its fair market value as of the first day of the taxable year is deemed distributed and included in the disqualified person's gross income.... The tax court properly found that Mr. Ellis engaged in a prohibited transaction by directing CST to pay him a salary[.]" [Ellis v. Comm'r of Internal Revenue, No. 14-1310 (8th Cir. June 5 2015)] (U.S. Court of Appeals for the Eighth Circuit)
DOL Web Page: Public Comments on Conflict of Interest Prohibited Transaction Exemptions
Web page includes links to comment letters submitted on the Prohibited Transaction Exemptions proposed on April 14, 2015, including the new Best Interest Contract Exemption and Principal Transactions in Debt Securities Exemption, and proposed changes to existing exemptions. Page is updated as new comments are submitted. (Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL])
[Guidance Overview] DOL Has Many Questions About Its Fiduciary Reproposal
"[In its fiduciary reproposal package, the DOL included] more than 170 questions concerning its proposal or matters left open in that proposal.... [T]hat approach both: [1] Constructively solicits input from the regulated community, and [2] Makes that input less informed and useful because significant elements of the proposal are open ended. Because many of the questions involve key issues, particularly under the expanded fiduciary definition and the proposed Best Interest Contract Exemption, they are collected [in a single comprehensive list in this article]." (Sutherland Asbill & Brennan LLP)
Examining the New Income Measures in the Census Bureau's Current Population Survey
"Compared with the estimated amount of income under the traditional income questions for 2013, the redesigned questions resulted in an estimated total annual income 9.1 percent larger for those ages 65 or older, an aggregate amount of almost an additional $133 billion. Furthermore, annual retirement income was 27.9 percent larger, an aggregate difference of almost $71 billion annually. Income from IRAs and 401(k)-type plans was an important component of this higher amount of annual retirement income found in the new questions, which overall was more than 250 percent higher than that found by the traditional measure." (Employee Benefit Research Institute [EBRI])
IRA Balances, Contributions and Rollovers, 2013 (PDF)
36 pages. "The average account balance decreased from $91,864 in 2010 to $87,668 in 2011 before increasing to $119,804 in 2013 -- an increase of 30.4 percent from 2010 to 2013, and 14.1 percent from 2012 to 2013.... The percentage of individuals who contributed to their IRA was relatively consistent ranging from 12.1 percent in 2010 to 13.8 percent in 2013.... The percentage of contributors who contributed the maximum rose from 43.5 percent in 2010 to 53.5 percent in 2012.... When examining the same individuals that were in the database each year from 2010 to 2013, the median percentage change in these individuals' account balances was a 33.6 percent increase." (Employee Benefit Research Institute [EBRI])
Missouri Rep. Ann Wagner Wages 'War' Against DOL Fiduciary
"A leading opponent of a Department of Labor proposal to raise investment-advice standards for brokers working with retirement accounts is pursuing an aggressive strategy -- that includes denying the agency funds to implement it -- to stop the rule.... Ms. Wagner argues that the rule would significantly raise regulatory and liability costs for brokers and price them out of serving the middle-income market of retirement savers." (Investment News)
[Opinion] New Fiduciary Regs Proposal, Part 3: People Are Talking (PDF)
"When all is said and done, the average person must judge his or her personal and retirement plan investments using tools that they can handle. The rules and disclosures of the Proposal are just too complex to do participants or plan fiduciaries any good. Of course, we all know that there are bad actors out there, and yes, we need to get them out of the business, but there has to be an easier, more effective way." (Ferenczy Benefits Law Center LLP)
[Opinion] U.S. Chamber of Commerce Comment Letter to EBSA on Proposed Information Collection Requests and Burden Estimates Associated with the DOL Conflict of Interest Proposed Rule and PTE Notices (PDF)
10 pages. "The potential magnitude of these burdens raises serious concern that the costs of the proposed regulation's information collection strategy may outweigh the benefits that the proposed regulation is likely to achieve. Rather than proceeding down a too-costly regulatory path, the government should consider more carefully whether there may exist prudent alternatives to achieve the desired protections and benefits." (U.S. Chamber of Commerce)
[Guidance Overview] DOL's Proposal to Expand Fiduciary Definition Would Bring Many Service Providers Into Scope
10 pages. "The reproposed definition of 'fiduciary' is intended to expand the scope of activities that will result in fiduciary status and application of the prohibited transaction rules, particularly covering many services that broker-dealers and other financial advisers provide to plans, plan participants, and Individual Retirement Account (IRA) owners. The DOL has provided exceptions for certain activities that, in its view, should not result in fiduciary status. The reproposal leaves ope n questions about what types of investment-related activities or communications may still be viewed as nonfiduciary even though they do not fall within one of the six carve-outs." (Morgan Lewis)
[Guidance Overview] DOL Reproposed Rules Governing the Definition of 'Fiduciary,' Part 2: The 'Best Interest Contract' Exemption
"[The Best Interest Contract (BIC)] exemption does not apply to advisers who advise on the selection on a menu of investment options.... The exemption exposes advisers and financial institutions to class action claims based on required warranties, which may involve an unacceptable level of risk.... The BIC exemption does not bar arbitration provisions as potential plaintiffs might have hoped, but it does ensure access to the courts for class actions. In the case of ERISA-covered retirement plans, this will likely mean access to federal court with limits on remedies.... The adviser must acknowledge, and will be subject to, fiduciary status. Accordingly, the adviser will be subject to ERISA-like standards, but remedies will not be limited in the case of IRAs." (Mintz Levin)
[Guidance Overview] Top Points from the DOL Proposal to Expand the Definition of Fiduciary
"[A]dvice does not have to be provided on a regular basis to result in fiduciary status. Thus, one-time contacts with a plan or IRA may result in fiduciary status.... The most restrictive provision of the best interest contract exemption is the definition of the 'assets' that qualify for the exemption.... Excluded from this definition is any equity security that is a security future or a put, call, straddle or other option or privilege of buying an equity security from or selling an equity security to another without being bound to do so." (DLA Piper)
[Guidance Overview] DOL Reproposed Rules Governing the Definition of 'Fiduciary', Part 1: The Rule and Its Exceptions
"In one camp are those who would impose an impossibly high fiduciary standard on the financial services industry without regard to the consequences to plan participants and investors; there are others who think the status quo is fine, despite transformative changes in the retirement investing environment over the past 40 years. [The authors] believe that there is a middle ground between the competing constituencies, and that the proposed regulations strike an appropriate conceptual balance of completing interests. However, [they] also believe that the proposal, as currently drafted, falls short in some important, practical respects. This post explains the proposed regulations and the context in which they arise." (Mintz Levin)
[Guidance Overview] Proposed Fiduciary Definition Would Impact Investment Adviser Practices
"The broader definition of investment advice fiduciaries, combined with the exclusion of communications to IRA owners from the carve-outs for seller transactions, platform providers and selection and monitoring assistance, would sweep more relationships with IRA owners into exposure to prohibited transaction excise taxes. The proposed amendments to current prohibited transaction exemptions would drive advisers to IRA owners toward reliance on the new proposed Best Interest Contract Exemption, which makes investment advisers agree to the same fiduciary standards as apply under ERISA and gives IRA owners enforceable rights ... Thus, under the proposed DOL scheme, what is not required by statute will be imposed by contract." (Faegre Baker Daniels LLP)
Age 70-1/2? Think Through Your RMD Choices
"The person who thinks that postponing is always a good idea because you defer the taxes a little longer should remember that postponing actually increases the amount of the second year's RMD -- because the age 70-1/2 year RMD that you did not take in the age 70-1/2 year is still part of the account balance at the end of the year! ... If the first year's RMD is postponed, two RMDs are required in the second year, and the two RMDs in the second year will have different deadlines, be based on different account balances, and use different divisors!" (Natalie Choate, via Morningstar Advisor)
[Opinion] What Retirement Savers Need to Know About the Fiduciary Rule
"According to the Labor Department: 'As baby boomers retire, they are increasingly moving money from ERISA-covered plans, where their employer has both the incentive and the fiduciary duty to facilitate sound investment choices, to IRAs (which are mentioned no less than 65 times in the Labor Department's proposed rule) where both good and bad investment choices are myriad and advice that is conflicted is commonplace.' And because of that, the Labor Department wants those providing 'investment advice' to IRA account owners to be 'fiduciaries' as well. And because of that, critics say IRA account owners, especially those with small accounts, will either get less advice or pay more for it if the proposed rule goes into effect as proposed." (MarketWatch)
[Opinion] What Retirement Savers Need to Know About the Fiduciary Rule
"According to the Labor Department: 'As baby boomers retire, they are increasingly moving money from ERISA-covered plans, where their employer has both the incentive and the fiduciary duty to facilitate sound investment choices, to IRAs (which are mentioned no less than 65 times in the Labor Department's proposed rule) where both good and bad investment choices are myriad and advice that is conflicted is commonplace.' And because of that, the Labor Department wants those providing 'investment advice' to IRA account owners to be 'fiduciaries' as well. And because of that, critics say IRA account owners, especially those with small accounts, will either get less advice or pay more for it if the proposed rule goes into effect as proposed." (MarketWatch)
[Opinion] The Hidden Provision in the DOL's Proposed Fiduciary Rule
"The DOL believes advisors who recommend portfolios consisting of low-management-fee index funds, passively managed funds or exchange-traded funds presumptively could be deemed to be acting in a manner consistent with their fiduciary obligation, since these investment options 'present minimal risk of abuse.' The DOL justifies this position by noting it is 'consistent with the prevailing (though by no means universal) view in the academic literature that posits that the optimal investment strategy is often to buy and hold a diversified portfolio of assets calibrated to track the overall performance of financial markets.' " (U.S. News & World Report)

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