By Jeremy T. Rodriguez, JD
IRA Analyst

In my last installment, I talked about one of my two favorite beginning of the year topics when it comes to retirement planning: New Year’s Resolutions (’s-resolutions-your-retirement). Here, I want to talk about the second topic, the most important laws, regulations, rulings, and decisions from 2018 that affect IRAs going forward. We’ve seen plenty of activity over the past year, on all fronts, so I boiled the discussion down to a top 5 (with an “and-1” tacked onto the end).


  1. Recharacterization of Conversions Eliminated – Technically, this law was passed in 2017, but no list would be complete without it. Under the Tax Cuts and Jobs Act (“TCJA”), the ability to recharacterize conversions was eliminated for any conversion completed on or after January 1, 2018. This change is a big deal. That means there are no do-overs when it comes to conversion, which in turn, also means that if you are doing a conversion, you need to be absolutely certain of two things: (1) That you accurately account for the income tax effect; and (2) that have the money (in non-tax deferred accounts) to pay the extra taxes. As a result, it’s safest to execute a conversion closer to the end of the year.


  1. In re Lerbakken – In this case, a bankruptcy court held that an IRA and 401(k) account acquired by an ex-spouse in a divorce were not exempt assets under bankruptcy law and were therefore subject to creditor claims. The ex-husband had foolishly left the money in his ex-wife’s IRA and 401(k) plan instead of requesting a direct trustee-to-trustee transfer of the IRA money and filing a Qualified Domestic Relations Order (“QDRO”) on the 401(k) funds. Nevertheless, while that is always the sound approach, it’s unclear from the Court’s decision whether this would’ve protected the money.

    The ultimate lesson here, if you have retirement plan money acquired through a divorce and are approaching bankruptcy, you should speak with a knowledgeable advisor or attorney and discuss the subject before making a bankruptcy filing.


  1. Sveen v. Melin -While this case dealt with a life insurance policy, it’s a U.S. Supreme Court decision that certainly could impact IRAs. Essentially, the Court held that a state’s revocation-upon-divorce voided, as of the date of the divorce, any beneficiary designation that named the ex-spouse. That is true even if the designation form is executed before a state passes such a law! These laws wouldn’t apply to qualified plans since ERISA would pre-empt them. They could, however, apply to IRAs.

    As a result, if you are going through a divorce and are thinking of keeping your ex-spouse as a beneficiary (either in whole or in part) of an IRA, then you really need to know whether your state has adopted such a law. If so, simply execute a new beneficiary form naming the ex-spouse after the divorce effective date.


  1. PLR 201840007 – While Private Letter Rulings (“PLRs”) only apply to the individual that submitted the ruling, this one is especially instructive. Basically, you had a discretionary trust that was named as an IRA beneficiary, but the trust had language that would certainly jeopardize the ability of the beneficiaries to stretch the distributions over a life expectancy.

    As a result, the beneficiaries met before September 30th of the year after death and executed a release. The release limited their rights under the trust in order to comply the stretch rules under the tax code. In the Ruling, the IRS approved the action and allowed the stretch distributions for the trust beneficiaries. The point here is to understand the rules and be pro-active in a manner consistent with IRS rules. Of course, that is going to require professional advice, but that advice saved these beneficiaries thousands in unnecessary taxes (notwithstanding the PLR fees).


  1. Increased Value of QCDs – Qualified Charitable Distributions (“QCDs”) aren’t new, and their increased value really came from the changes enacted by the TCJA, which was passed in 2017. Nevertheless, the discussion wouldn’t be complete without mentioning this. The TCJA eliminated, or reduced, many itemized deductions, most notably the miscellaneous deductions that were subject to the 2% floor and the state and local tax deduction. It also increased the standard deduction. The result is that more people will be using the standard deduction.

    This is where QCD’s come in. They allow people who are age 70 ½ or older who are receiving required minimum distributions, and don’t want them, to contribute those distributions to a charity and exclude the distribution from their income…. even if they use the standard deduction!


  1. Bonus Addition: Disaster Relief – The last thing I want to mention is the pattern we’ve seen Congress and the IRS take toward federal disasters since 2016. Some of those tax relief rules have allowed IRA owners in affected areas to take distributions of up to $100,000. These distributions are not only exempt from the 10% early distribution penalty, but the income tax effects can either be spread ratably over a 3-year period or be repaid, and thereby have zero effect! However, this treatment hasn’t been entirely consistent, so if you do happen to live in a federal disaster area, you’ll want to stay informed about any tax relief rules issued by Congress or the IRS.

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