Life and Death Planning for Retirement Benefits

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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
8.1 IRAs: Issues for Investors
For what an IRA may legally invest in, and how to hold IRA investments, see For
the tax effects of losses in IRA investments, see
8.1.01 Various investment issues for IRAs
This 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. The IRA owner’s payment of IRA investment
management expenses from “outside” assets does not violate this rule; se
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; se In fact, if property is distributed from the distributing
plan or IRA, you must “roll” the exact same property to the IRA; see
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 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 C.B. 32 (holding #2); Reg.
A-16. For minimum distribution effects of a distribution of property, see 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 (“Holding Period of Property”), Reg
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. Se 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