Services that Quest Trust Company Offers

When people are planning out their futures, they want to know that they are going to be covered for life. They want to know that whatever path they decide to follow, that when the time comes they will be set to retire and live out the rest of their lives comfortably. It is important to be in a retirement plan that is best suited to the career you choose to follow. With Quest Trust Company you will have many different retirement plans to select from, but some of the most popular are the Traditional IRA, the Roth IRA, the SEP IRA, and the SIMPLE IRA. Below we will be covering the basics of each of these plans.

Traditional IRA

With the Traditional IRA the account growth is tax deferred, so the money put into it isn’t taxed. Instead you pay taxes on the distributions. You are able to take out distributions at any time, however, you are penalized 10% if you take out any before the age of 59 ½. This plan has many tax advantages and is especially popular for people whose employers don’t offer a retirement plan. You can find more information and look into opening a Traditional IRA here.

Roth IRA

Roth IRAs are similar to Traditional IRAs in the sense that you contribute a certain amount each month in order to save for your retirement. However, with Roth IRAs, rather the having your contribution tax deferred, it is taxed before. When you distribute, then, it is tax free. These are popular for people who start their retirement savings at a young age because they can watch it grow over their entire lives. Also, if you plan to earn more later in life, you can pay the smaller tax now when you contribute and avoid a larger tax later when you distribute. There are income limitations to Roth IRAs, however, so this option isn’t available to everyone. You can find more information in Roth IRAs here.

SEP IRA

The Simplified Employee Pension Plan (SEP) IRA is typically used by people who own their own small businesses. With this plan, business owners are able to contribute to their own accounts, as well as their employees accounts, in addition to what they are already contributing. To learn more about setting up an SEP IRA you can go here.

SIMPLE IRA

Savings Incentive Match Plan for Employees (SIMPLE) IRAs is another option for business owners. The SEP IRA and the SIMPLE IRA are very similar in that you are able to contribute to your own account as well as your employees account. However, with SIMPLE IRAs there is a larger early withdrawal penalty, and the eligibility for a SIMPLE IRA is a little bit different. To learn more about SIMPLE IRAs you can go here.

Planning for your future may seem daunting, but there are tons of options to pick from so that you can find one that is best for you. Although these are some of the more common ones, Quest Trust Company does have other plans to choose from if none of these fit your needs. You can find some of their other options here and choose one that is best for you.

Give one of our IRA Specialists a call at 855.386.4727 for a complimentary consultation!

Why It’s Important To Open A Self-Directed IRA This Year

The unfortunate truth for many retirement savers is that they aren’t able to accumulate large nest eggs merely because they never got started. It’s a simple fact that a person that already has a self-directed IRA set up is much more likely to contribute to it in a given year than a new saver is to set up an account in the first place.
But that’s just one of the reasons why it’s important to open a self-directed IRA this year if you don’t already have one.

The Power of Time. It might not seem intuitive, but the contributions a person makes to their self-directed IRA each year are not likely to comprise the bulk of the account value after a number of years.

For example, let’s look at an individual who makes $5,000 contributions to their self-directed IRA each year, and who makes investments that grow at an annual rate of 8%. Let’s further assume that this individual makes these contributions every year from the age of 25 until they’re 45, and then doesn’t make any additional contributions to their account after age 45.

By the time they reach age 65, their account will have a value of over $1.1 million, even though they only contributed a total of $100,000 of that amount. The rest of their account balance is attributable to earnings, interest, and compounding on those amounts. The best way to increase the chances of accumulating the largest possible amount for retirement is to give your money time to grow.

More Investment Choices. A self-directed IRA will give you a much greater range of investment options for your retirement account. These include real estate, precious metals, private equity, private debt instruments, and more. IRAs with traditional custodians (such as banks and discount brokers) don’t permit you to make these types of investments. Having more investment choices will let you save for retirement in a way that exactly matches your investment philosophy.

To Build Good Habits. Once you open a self-directed IRA, you’ve already established a precedent for yourself. You can more easily build future contributions into your budget (which will greatly increase the chances that you’ll actually make them) because you already have an account set up to accept them.

Remember that you don’t have to make your entire annual contribution to your self-directed IRA all at once. It’s also possible to break it down into monthly amounts (or whatever frequency you wish) and make them over the course of the year. But you have to have an account set up in order to do so.

The amount of time you’ll need to fill out the necessary paperwork for a new self-directed IRA isn’t as much as you might think, and it’s worth completing that paperwork sooner rather than later. Contact a self-directed custodian such as Quest Trust Company today in order to get started.

What’s Your Self-Directed IRA Investing Plan For The New Year?

Many of us tend to think about our “big picture” financial issues relatively infrequently. A once a year review is often all the time we’re able or willing to spend, so it’s important to get the most out of our planning. Here are some tips for helping you formulate your investing plan with your self-directed IRA next year.

1. What Has Changed Since Last Year?
The best starting point is probably to evaluate what has changed since last year, or the last time you updated your self-directed IRA investing plan. Consider personal circumstances such as a marriage or divorce, the birth of a new child, or a child going off to college. Also consider any professional changes, such as moving to a new job, a promotion, or going back to school in order to switch careers. All of these factors can have direct impacts on your investing plan.

2. Do Your Investing Assumptions Still Hold True?
Also go back and review the reasons and assumptions you had when you first meet each portfolio investing in your self-directed IRA. Do those same reasons still hold true? In many cases, determining whether or not to hold on to your existing investments can be as simple as simply asking yourself the question “would I choose to buy this asset today at this price?”

3. Consider Transaction Costs.
Of course, deciding that you don’t want to hold a particular investment anymore doesn’t mean that you have to sell it right now, regardless of cost. It’s generally a good idea not to churn through your portfolio and trade in and out of investments too quickly (very few individuals are actually doing this successfully on a long-term basis). But you should not ignore any additional costs that you may incur, or market fluctuations that you have to bear, trying to dispose of a portfolio asset right now. For example, you might hold a single family home as an investment property, and determined that the market for sales in your area is generally much better in April or May that it is in December or January.

4. Know Yourself.
Finally, it’s important that you know yourself, in the sense that you understand your own personal investing philosophy. Individuals who choose investments that are outside of their comfort zone can often make bad decisions when they come face-to-face with significant market volatility or other macro level events. By taking a look at your past investing behaviors – most notably whether you are prone to selling market lows or buying at market highs – you can match directed IRA investments to your own investing sensibilities.

If possible, don’t make the mistake of only thinking about your portfolio on a yearly basis. The new year is a great time to take a look at things, but you probably want to consider doing that again before the next new year rolls around.

U. S. Supreme Court Rules that Inherited IRAs Are Not Protected In Bankruptcy

On June 12, 2014, the United States Supreme Court ruled in a unanimous opinion that inherited Roth and traditional IRAs are not protected from creditors under the “retirement funds” exemption in the U.S. Bankruptcy Code.  The case is Clark v. Rameker, Trustee, 573 U.S. ____ (2014).

In 2001, Heidi Heffron-Clark inherited a traditional IRA worth approximately $450,000 from her mother, Ruth Heffron.  Ms. Heffron-Clark elected to take monthly distributions from the account.  In 2010, Ms. Heffron-Clark and her husband Brandon Clark filed Chapter 7 bankruptcy and identified the inherited IRA, then worth approximately $300,000, as exempt under Bankruptcy Code Section 522(b)(3)(C).  The bankruptcy trustee and unsecured creditors objected to the exemption on the ground that funds in an inherited IRA were not “retirement funds” within the meaning of the statute.  The Bankruptcy Court agreed, and disallowed the exemption.  The Clarks appealed to the District Court, which reversed the decision of the Bankruptcy Court.  Undeterred, the bankruptcy trustee Rameker appealed to the 7th Circuit Court of Appeals, which reversed the District Court and ruled that the inherited IRA was not exempt.  The 7th Circuit Court expressly disagreed with the 5th Circuit’s ruling in In Re Chilton, 674 F.3d 486 (2012), which ruled in favor of the debtor’s exemption of an inherited IRA.  The U.S. Supreme Court decided to hear the case to resolve the conflict between the Circuit Courts.

When an individual debtor files bankruptcy, his assets become part of the bankruptcy estate.  However, the Bankruptcy Code allows debtors to exempt from the bankruptcy estate some limited property.  The exemption in this case allows debtors to protect “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code” (see Sections 522(b)(3)(C) for state exemptions and 522(d)(12) for federal exemptions) .  Traditional IRAs are created under Internal Revenue Code (IRC) Section 408, and Roth IRAs are created under IRC 408A.

The Supreme Court ruled that the ordinary meaning of “retirement funds” is properly understood to be sums of money set aside for the day an individual stops working.  According to Justice Sotomayor, who wrote the unanimous opinion for the Court, there are three legal characteristics of inherited IRAs which provide objective evidence that they do not contain such funds: 1) the holder of an inherited IRA may never contribute additional money to the account; 2) holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement; and 3) the holder of an inherited IRA may withdraw the entire balance of the account at any time, and use the money for any purpose, without penalty.  This interpretation is said to be consistent with the purpose of the Bankruptcy Code’s exemption provisions, which effectuate a careful balance between the creditor’s interest in recovering assets and the debtor’s interest in protecting essential needs.  Nothing about an inherited IRA’s characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption.  The court was not persuaded by the Clarks’ claim that funds in an inherited IRA are retirement funds because, at some point, they were set aside for that purpose.

So what are the implications of this ruling for those who inherit traditional or Roth IRAs?  If the inheritor of an IRA is a spouse who is under age 59 ½, they would normally want to leave the IRA as a beneficiary (inherited) IRA rather than roll the IRA into their own account.  As long as the funds are being distributed from an inherited IRA there is no 10% premature distribution penalty, and the spouse would not be required to withdraw money from the IRA until their deceased spouse would have reached age 70 ½.  This gives the surviving spouse access to money in the inherited IRA which they may need.  However, now an inherited IRA will not be protected in bankruptcy in most cases, so a spouse who is in financial difficulty may decide to roll the inherited IRA into their own IRA where at least it will have creditor protection.

If a non-spouse beneficiary inherits an IRA, it cannot be rolled into their own IRA and must either be distributed entirely by the end of the 5th year following the year of death or over the inheritor’s expected lifetime.  If the IRA is inherited directly by the non-spouse beneficiary, there will be no way in many cases to protect that IRA in bankruptcy.  One solution that some planners have proposed is the leave the IRA to a properly drafted spendthrift trust rather than to the beneficiary directly.  Having the IRA inherited by a properly drawn spendthrift trust can prevent the IRA funds from going to the beneficiary’s creditors.  This ruling may be a boon to estate planning attorneys.

The news is not all bad, however.  Some states, such as Texas and Florida, specifically protect inherited IRAs from creditors.  Debtors who live in these states will have their inherited IRAs protected from creditors outside of the bankruptcy context and even in bankruptcy (assuming they meet the residency requirements) if they choose to use the state exemptions instead of the federal exemptions.  However, a person with a large IRA should not automatically assume that the IRA would be protected even if they and their children live in a state with creditor protection for inherited IRAs.  The state exemptions apply to the residence of the debtors, not to the residence of the deceased person, and people move around a lot.  Life happens.  Where your beneficiaries live now may not be where they live after inheriting your IRA.  Unexpected events occur, and you must plan for them.

One thing is certain – estate planning for those with beneficiaries who are struggling with financial issues has become even more important.  Also, bankruptcy planning for anyone who has a large inherited IRA just got more complex.

For a more complete analysis of the Clark v. Rameker case see the blog post of Texas bankruptcy attorney Steve Sather at http://stevesathersbankruptcynews.blogspot.com/2014/06/supreme-court-denies-exemption-for.html.  You may read the Supreme Court’s opinion at http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf.

Nothing in this article is intended as tax, legal or investment advice.  If you need assistance with estate or bankruptcy planning, you should consult with a competent professional who practices law in these areas.

Take advantage of the many FREE educational materials provided by Quest Trust Company, Inc. on our website at www.QuestIRA.com, and plan on attending as many of the live events as possible to network with other self-directed IRA clients.  Our events schedule may be found at www.questira.com/events/. You can also call our offices toll-free at 800-320-5950 or 855-FUN-IRAS (855-386-4727) and ask to speak to one of our highly trained IRA Specialists.  Happy holidays!

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest Trust Company, Inc. (www.QuestIRA.com), a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Quincy@QuestTrust.com. Nothing in this article is intended as tax, legal or investment advice.

© Copyright 2013 H. Quincy Long. All rights reserved.

MAJOR CHANGE in interpretation of 60 day rollover rule

UPDATE

The Tax Court ruled in the case of Bobrow v. Commissioner, T.C. Memo 2014-21, that the one-time per 12 calendar month 60-day rollover rule applies to ALL of the taxpayer’s IRAs, and not to each IRA separately. This is in direct conflict with information contained in IRS Publication 590 and in Proposed Regulation 1.408-4(b)(4)(ii).

UPDATE: In IRS Announcement 2014-15, the IRS has indicated that it will withdraw Proposed Regulation 1.408-4(b)(4)(ii) and will interpret the 60-day rollover rule in accordance with Bobrow. However, in order to give IRA custodians and trustees time to update their administrative procedures and their IRA disclosure documents, the IRS has announced that it will delay the application of the Bobrow interpretation of the 60-day rollover rule until January 1, 2015.
A summary of the ruling is below:

Bobrow, TC Memo 2014-21

The Tax Court has ruled that Code Sec. 408(d)(3)(B)’s one-rollover-per-year rule applies to allof a taxpayer’s IRAs, not to each of his IRAs separately.

Facts. Alvan and Elisa Bobrow, husband and wife, were a married couple who filed a joint federal income tax return. On Apr. 14, 2008, he requested and received two distributions from his traditional IRA in the combined amount of $65,064. On June 6, 2008, he requested and received a $65,064 distribution from his rollover IRA. On June 10, 2008, Alvan transferred $65,064 from his individual account to his traditional IRA. On July 31, 2008, Elisa requested and received a $65,064 distribution from her traditional IRA. On Aug. 4, 2008, they transferred $65,064 from their joint account to Alvan’s rollover IRA. On Sept. 30, 2008, Elisa transferred $40,000 from Taxpayers’ joint account to her traditional IRA.

The taxpayers did not report any of the distributions as income. They claimed that they implemented tax-free rollovers of all of the distributions. IRS asserted that the June 6 distribution to Alvan and the July 31 distribution to Elisa were taxable.

Background. Generally, Code Sec. 408(d)(1) provides that any amount distributed from an IRA is includible in gross income by the distributee. However, Code Sec. 408(d)(3)(A) allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA if the entire amount is subsequently paid (i.e., rolled over) into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution.

Code Sec. 408(d)(3)(B) limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRAs and individual retirement annuities. Specifically, Code Sec. 408(d)(3)(B) provides: “This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.”

The reference to “any amount described in subparagraph (A)(i)” refers to any amount characterized as a nontaxable rollover contribution by virtue of that amount’s being repaid into a qualified plan within 60 days of distribution from an IRA. The one-year limitation period begins on the date on which a taxpayer withdraws funds from an IRA. (Code Sec. 408(d)(3)(B))

June 6 distribution to husband failed the one-rollover-per-year rule. The Tax Court ruled in favor of IRS, that the June 6 distribution was taxable because Alvan failed the one-rollover-per-year rule.

The Bobrows asserted that the Code Sec. 408(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs. Therefore, they argued, Code Sec. 408(d)(3)(B) did not bar nontaxable treatment of the distributions made from Alvan’s traditional IRA and his rollover IRA. The taxpayers did not cite any supporting case law or statutes that would support their position.

The Court said that the plain language of Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation laid out in Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. In support of this theory, the Court emphasized the word “an” in each place that it appears in Code Sec. 408(d)(3)(B).

The Court then explained its rationale for concluding that the June 6 distribution, rather than the Apr. 14 distribution, was taxable. When Alvan withdrew funds from his rollover IRA on June 6, the taxable treatment of his April 14 withdrawal from his traditional IRA was still unresolved since he had not yet repaid those funds. However, by recontributing funds on June 10 to his traditional IRA, he satisfied the requirements of Code Sec. 408(d)(3)(A) for a nontaxable rollover contribution, and the April 14 distribution was therefore not includible in the taxpayers’ gross income. Thus, Alvan had already received a nontaxable distribution from his traditional IRA on April 14 when he received a subsequent distribution from his rollover IRA on June 6.
Finally, the Court took note that Alvan received two distributions on April 14. It said that it would be inappropriate to read the Code Sec. 408(d)(3)(B) limitation on multiple distributions so narrowly as to disqualify one of the April 14 distributions as nontaxable under Code Sec. 408(d)(3)(A). So, it treated the amounts distributed on April 14 as one distribution for purposes of Code Sec. 408(d)(3)(A).
The July 31 distribution to wife was repaid too late. IRS put forth two arguments as to why the July 31, 2008, distribution was ineligible for nontaxable rollover treatment: (1) the funds were not returned to a retirement account maintained for Elisa’s benefit, and (2) repayment of funds was not made within 60 days.

As to argument (1), IRS asserted that because she distributed the funds first to the taxpayers’ joint account and the taxpayers thereafter transferred $65,064 from their joint account to husband’s rollover IRA, the July 31 distribution was paid into an IRA set up for Alvan’s benefit and not into an IRA set up for Elisa’s benefit. The Court disagreed with that argument: it said that money is fungible, and the use of funds distributed from an IRA during the 60-day period is irrelevant to the determination of whether the distribution was a nontaxable rollover contribution.

The Court did agree with IRS’s second argument. Partial repayment was not made until Sept. 30. Sixty days after July 31 was Sept. 29

 

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest Trust Company, Inc. (www.QuestTrust.com), a self-directed IRA Custodian with offices in Houston, Dallas, and Austin, Texas, and clients Nation-wide. He may be reached by email at Quincy@QuestTrust.com. Nothing in this article is intended as tax, legal or investment advice.

© Copyright 2013 H. Quincy Long. All rights reserved.