Life and Death Planning for Retirement Benefits

CHAPTER 8: INVESTMENT ISSUES; PLAN TYPES

Investment issues with IRAs and Roth IRAs; types of retirement plans.

This Chapter discusses tax issues connected with how an IRA is invested (¶ 8.1–¶ 8.2), and describes the types of retirement plans covered by this book (¶ 8.3) . 8.1 IRAs: Issues for Investors

For what an IRA may legally invest in, and how to hold IRA investments, see ¶ 8.1.05 . For the tax effects of losses in IRA investments, see ¶ 8.1.02 .

Various investment issues for IRAs

This ¶ 8.1.01 explains some ordinary and not so ordinary issues that can arise with IRA investments. A. IRA contributions, distributions, rollovers: Cash vs. property. You cannot contribute stock, real estate, your business, or any other noncash asset to an IRA; an IRA may accept only cash contributions. § 408(a)(1) . The IRA owner’s payment of IRA investment management expenses from “outside” assets does not violate this rule; see ¶ 8.1.04 . The only exception to the cash-contributions-only rule is for rollovers: Property that is distributed from one plan or IRA may be “rolled” into an IRA if the distribution otherwise meets the requirements for a rollover; see ¶ 2.6.02 . In fact, if property is distributed from the distributing plan or IRA, you must “roll” the exact same property to the IRA; see ¶ 2.6.04 . IRA (including Roth IRA) distributions can be in either cash or property. Property distributed is generally included in income at its fair market value; see ¶ 2.1.01 . The amount so included then becomes the individual’s basis for determining gain or loss on the distributed property on its subsequent disposition. Rev. Rul. 80-196, 1980-2 CB 32 (holding #2); Reg. § 1.408A-6 , A-16. For minimum distribution effects of a distribution of property, see ¶ 1.2.02 (E). Because the recipient’s basis in the distributed property is the value of the property on the date of distribution ( i.e., it is not a “carryover” of the IRA’s cost basis in the property), the holding period for the distributed property, for purposes of determining whether gain or loss on a subsequent disposition is long- or short-term, would begin the day after the date of distribution, as if the distributee had purchased the securities on the date of distribution—not on the date the IRA acquired the security. See § 1223(2) (“Holding Period of Property”), Reg. § 1.402(a)-1(b)(1) . B. Prohibited transaction from standard brokerage account form. An IRA can be disqualified ( i.e., lose its status as an IRA) for such “prohibited transactions” as borrowing from or against the account by the IRA owner. See ¶ 8.1.06 (B). In DOL Advisory Opinion 2009-03A, an individual proposed to open an IRA at a brokerage firm. The firm would require the individual to give the firm a security interest (to secure any indebtedness incurred in the IRA) in the individual’s nonIRA accounts held at that firm. The DOL ruled that granting a security interest in nonIRA assets to secure an indebtedness of the IRA was a prohibited transaction, namely, an extension of credit between the IRA and a disqualified person (the IRA owner). The DOL noted that a prohibited transaction would similarly arise