Rollover IRAs

Submitted by Jason Hochstadt on Tue, 2016-04-19 18:23

Hello,

Client who resides in NJ has 3 Rollover IRAs aggregating $650k in total (from old 401k Plans).

1. Is there any reason why they cannot/should not be combined?

2. Is the federal bankruptcy limit applicable to Rollover IRAs from qualified plans? Or simply IRAs funded with contributions? What is the current federal limit (I believe around $1.25 million).

3. Do you know how NJ treats Inherited IRAs from a creditor perspective (given the Supreme Court’s Ruling on Inherited IRAs in late 2014)? Do you believe that spouses would be treated the same as non-spouses in terms of Federal law? Would use of a see-thru trust, whether conduit or acceleration and whether for a spouse or non-spouse, potentially avoid the Inherited IRA creditor ruling at the Federal level?

4. Finally, if client contributed to an employer-sponsored retirement plan in the past that was not a 401(k) Plan (e.g. old money purchase; profit sharing only; etc.)., so any contributions made were not tax deductible for NJ tax purposes, is the only way to receive a pro-rata % of distributions tax-free for NJ income tax purposes if the client has records of contributions to support the basis calculation?

Thank you.

Jason



Submitted by Alan - IRA critic on Tue, 2016-04-19 21:55

  1. No reason not to combine the 3. Just do not combine with IRAs that received regular contributions.
  2. One asset protection site I use shows that NJ provides 100% creditor protection for IRA accounts, and if so the federal BK Act is immaterial. However, client might re locate to another state that does not provide complete IRA creditor protection. If that occurs and the federal BK Act applies in the other state, his rollover IRAs are protected without dollar limits. His non rollover IRAs are protected for about 1.3mm inflation adjusted. I have not seen the most recent inflation adjustment but it would probably come in just under 1.3mm.
  3. Generally, if the state does not legislate specific creditor protection for inherited IRAs, it is likely that they do not have any. A properly drafted trust beneficiary should have creditor protection. Remember, there is always the question of creditor protection for distributions from IRAs, even if the IRA itself is protected.
  4. Cannot help with this one. Most states that do not conform with federal tax rules for retirement plans use some form of worksheet to figure basis recovery as a subtraction on the state form. I have not heard of much state oversight regarding backup documentation but suspect most taxpayers might lack such documentation.

 

Submitted by Ben Meyer on Sun, 2016-04-24 03:18

  • Regarding topic 4, New Jersey provides specific rules for basis recovery when the NJ basis differs from the federal basis.  For any type of plan in NJ, it is necessary to have a record of the amounts contributed by the employee in order to make a correct determination of the amount of basis to be recovered in each distribution.  Frequently the statements received from the plan will state the amount of employee contributions.  Sometimes this only appears in the annual summary.  The contributions would therefore constitute the basis in the plan, assuming the contributions were made after establishment of the NJ Gross Income Tax in 1976.
  • For situations where the plan was not an IRA or 401(k), New Jersey has a special New Jersey “General Rule Method” for basis recovery.  This is NOT the same as the federal general rule for pensions .  However, the effect is largely similar.  A calculation is performed for each year that distributions are received to determine a pro-rata amount of basis deemed to be drawn from the plan.  See NJ publication GIT-1, Pensions and Annuities.  However, the direction provided is somewhat vague, so a conservative approach is advised.
  • NJ also has a 3-year rule which applies where the amounts to be received in the first three years are equal or greater to the basis, and where some amount of employer contributions were made.  This rule might apply here if the plan received employer contributions. 
  • New Jersey also has a number income exclusions that apply for persons 62 or over and/or disabled, with income limits and/or for persons who don’t qualify for Social Security.

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