General Rules Of Individual Retirement Plans

<div class="Section1">Prior to TRA &rsquo;84, the IRC provided for the issuance of retirement bonds.<a href="#_ftn1" name="_ftnref1">¹</a> These bonds were issued by the U.S. government, with interest to be paid on redemption. Sales of these bonds were suspended as of April&nbsp;30, 1982.<a href="#_ftn2" name="_ftnref2">²</a> Subsequently, the Treasury Department announced that existing bonds could be redeemed by their holders at any time without being subject to an early distribution penalty ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>).<a href="#_ftn3" name="_ftnref3">³</a> Existing bonds also can be rolled over into other individual retirement plans under rules applicable to rollovers from individual retirement plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409, as in effect prior to repeal by TRA &rsquo;84.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treasury Release (4-27-82).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treasury Announcement (7-26-84).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409(b)(3)(C), prior to repeal.<br /> <br /> </div></div><br />

<div class="Section1">An IRA offers tax-free build up on contributions. The earnings on a traditional IRA are tax deferred to the owner; that is, they are not taxed until the owner begins receiving distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>). The earnings on a Roth IRA may or may not be taxed upon distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>). Like a trust that is part of a qualified plan, an individual retirement account is subject to taxes for its unrelated business income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3974">3974</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4098">4098</a>).<div class="Section1"><br /> <br /> Tax deferral is lost if an individual engages in a prohibited transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>) or borrows under an individual retirement annuity. The loss occurs as of the first day of the tax year in which the prohibited transaction or borrowing occurred.<a href="#_ftn1" name="_ftnref1">¹</a> For an account established by an employer or association of employees, only the separate account of the individual loses its deferred status.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Prohibited transactions include: borrowing money from the IRA, selling property to it and using IRA assets for personal use or as security for a personal loan. Additionally an IRA is prohibited from investing in collectibles (e.g. artwork, antiques, stamps) and life insurance.<br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e); Treas. Reg. &sect;&nbsp;1.408-1.<br /> <br /> </div></div><br />

<div class="Section1">The IRS has ruled that interest paid on amounts borrowed to fund an IRA is not allocable to tax-exempt income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3652">3652</a>). Therefore, the deduction of such interest is not subject to the general prohibition against deducting interest incurred or carried to purchase tax-exempt assets.<a href="#_ftn1" name="_ftnref1">¹</a> Because such interest is &ldquo;on amounts borrowed to buy or carry property held for investment,&rdquo; it would seem that it should be classified as &ldquo;investment interest expense&rdquo; and the deduction limited.<div class="Section1"><br /> <br /> Interest paid on money borrowed to buy property held for investment is investment interest. Such interest is deductible but generally limited to the taxpayer&rsquo;s net investment income for the year.<a href="#_ftn2" name="_ftnref2">²</a> Generally, interest incurred to produce tax-exempt income is not deductible.<br /> <br /> Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Investment property also includes an interest in a trade or business activity in which the taxpayer did not materially participate (other than a passive activity).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Let. Rul. 8527082. <em><em>See</em> </em>IRC &sect;&sect;&nbsp;163(a), 265.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRS Publication 550 (2018).<br /> <br /> </div></div><br />

<div class="Section1">Sequence of returns risk is a market volatility issue surrounding the order in which returns on a taxpayer’s investments occur when the taxpayer is taking distributions or withdrawals from the portfolio.</div><br /> <div class="Section1"><br /> <br /> Essentially, if a greater proportion of low or negative returns occur during the early years of retirement, when taxpayer is taking withdrawals, the taxpayer’s overall returns are going to be lower than if those negative or low returns occurred at a later point in the taxpayer’s (and the investment’s) lifetime. Mathematically, this is because the withdrawal of a fixed dollar amount from a portfolio when the portfolio value is down requires the liquidation and distribution of a larger percentage of the portfolio than would be required when the portfolio value is high. These early low (or negative) returns and distributions have a larger impact on the compounded value of the portfolio if they occur in early years. Negative returns could even cause a portion of the principal investment to be lost.<br /> <br /> Even if the return is simply lower than average in the early years while distributions are being taken, the investment will generate an overall lower return because the investment will gain less value early on, meaning there will be a lower account value to generate growth even in later, higher return periods.<br /> <br /> When the taxpayer is making withdrawals from his or her investment accounts, the risk of outliving the retirement assets is magnified when negative returns occur in early years.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Financial planners modeling sequence of returns risk for their clients can illustrate the potential impact of (1) reducing market volatility of the overall portfolio, (2) reducing withdrawal amounts in early years or delaying withdrawals from the portfolio in down markets, and (3) maintaining a balanced portfolio so that withdrawal amounts can be paid from assets with a stable asset value rather than from selling volatile assets in a depressed market – as strategies to mitigate the potential impact of sequence of returns risk.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Distributions from traditional and Roth IRAs are not subject to the 3.8 percent net investment income tax (also known as the Medicare contribution tax) imposed under the Affordable Care Act. The tax equals 3.8 percent of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount ($200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> IRC Section 1411 specifically excludes distributions from both traditional and Roth IRAs and other qualified plans from the definition of “net investment income.”<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> While taxable distributions from traditional IRAs are not subject to the net investment income tax, they do increase a taxpayer’s modified adjusted gross income (MAGI) for the year. A higher MAGI may expose taxpayer’s other investment income (or increase taxpayer’s exposure) to this 3.8 percent tax. Planners should consider the effect of an IRA distribution on a client’s MAGI and exposure to the net investment income tax.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRS Publication 550 (2018).<br /> <br /> </div>

<div class="Section1">Contributions to both a traditional IRA and Roth IRA must be made by the tax filing deadline for the tax year in question, not including extensions. For example, a taxpayer who wishes to contribute to an IRA must do so prior to the federal tax filing deadline of the following year. This rule applies whether the IRA is an existing or new plan.</div><br /> <div class="Section1"><br /> <br /> With respect to traditional IRAs, contributions may be deducted for that tax year if the contribution is made on account of that year. This applies both to contributions to individual plans and contributions to spousal plans.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A postmark is evidence of the timeliness of the contribution.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 219(f)(3), 408A(c)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Let. Ruls. 8633080, 8611090, 8536085.<br /> <br /> </div>

<div class="Section1"><em>Editor’s Note:</em> The 2017 tax reform legislation eliminated the ability of taxpayers to recharacterize Roth IRA conversions for tax years beginning after 2017. The IRS released a FAQ confirming that taxpayers were entitled to recharacterize 2017 conversions through October 15, 2018.</div><br /> <div class="Section1"><br /> <br /> Prior to 2018, if a taxpayer rolled over funds from a traditional IRA or other eligible retirement plan to a Roth IRA during the taxable year, and later discovered that for any reason he or she wanted the transaction undone, the taxpayer generally had until the due date for filing his or her return (including extensions) to correct the conversion without penalty, to the extent all earnings and income allocable to the conversion were also transferred back to the original IRA, and no deduction had been allowed with respect to the original conversion.<a href="#_ftn1" name="_ftnref1">¹</a> This “recharacterization” in the form of a trustee-to-trustee transfer resulted in the recharacterized contribution being treated as a contribution made to the transferee IRA, instead of to the transferor IRA.<a href="#_ftn2" name="_ftnref2">²</a> A taxpayer was able to apply to the IRS for relief from the time limit for making a recharacterization.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> After tax reform, if a taxpayer makes a Roth contribution, he or she is permitted to recharacterize the transaction as a contribution to a traditional IRA before the due date for his or her income tax return for the year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr /><br /> <br /> For purposes of a recharacterized contribution, the net income attributable to a contribution made to an IRA was determined by allocating to the contribution a pro-rata portion of the earnings or losses accrued by the IRA during the period the IRA held the contribution. This allowed the taxpayer to claim any net income that is a negative amount.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A time restriction was placed on reconversions (i.e., converting to a Roth IRA a second time after recharacterizing a first conversion). A person could reconvert back to a Roth IRA but only after the later of the beginning of the next year or 30 days after the recharacterization.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Prior to 2018, where the value of converted property dropped after a conversion to a Roth IRA, it was often useful to recharacterize the contribution back to a traditional IRA and then reconvert to a Roth IRA to reduce the amount taxable on converting to a Roth IRA. The time restriction on reconversions reduced, but did not eliminate, the potential value of this technique.<br /> <br /> <hr /><br /> <br /> Reconversions and recharacterizations had to be reported to the IRS on Form 1099-R and Form 5498. Prior year recharacterizations had to be reported under separate codes. All recharacterized contributions received by an IRA in the same year were permitted to be totaled and reported on a single Form 5498.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 408A(d)(6); Notice 2008-30, 2008-1 CB 638, A-5.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.408A-5.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Let. Ruls. 200234073, 200213030.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 408A(d)(6)(B)(iii).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   Treas. Reg. § 1.408A-5; Notice 2000-39, 2000-2 CB 132.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.   Treas. Reg. § 1.408A-5, A-9.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.   Notice 2000-30, 2000-1 CB 1266.<br /> <br /> </div>

<div class="Section1">The IRS has ruled that the payment of administrative or trustee fees incurred in connection with an individual retirement account may be claimed as a miscellaneous itemized deduction (i.e., for the production or collection of income) if such fees are separately billed and paid.<a href="#_ftn1" name="_ftnref1">¹</a> However, the 2017 tax reform legislation suspended all miscellaneous itemized deductions subject to the 2 percent floor for 2018-2025. Furthermore, if separately billed and paid, the payment of such fees does not constitute a contribution to the individual retirement account and thus will not be an excess contribution or reduce the amount that may be contributed to the account or, in the case of a traditional IRA, deducted ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>).<a href="#_ftn2" name="_ftnref2">²</a> Deduction of administrative fees is subject to the 2 percent floor on miscellaneous itemized deductions (prior to 2018).<div class="Section1"><br /> <br /> Sales commissions on individual retirement annuities that are billed directly by an insurance agent to the client and paid separately by the client are not separately deductible, but are subject to the overall limits on contributions and deductions.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Similarly, broker&rsquo;s commissions incurred in connection with the purchase of securities on behalf of an IRA are not separately deductible, but are subject to the overall limits.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> An annual maintenance fee charged for self-directed brokerage accounts that did not vary with the number of transactions, the number of securities involved, or the dollar amount and that was paid to the trustee, not the broker, was not treated as a commission but was separately deductible as an administrative fee.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> In addition, brokerage account &ldquo;wrap fees&rdquo; that were based on a percentage of assets under management, but that did not vary based on the number of trades in the account, were not treated as a commission and were separately deductible as an administrative fee.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The IRS has held that the payment of fees associated with flexible premium variable annuity contracts that are paid directly from subaccounts within the contract would not be considered a distribution from the contract.<br /> <br /> The IRS ruled that assessing expenses against the contract is unrelated to whether or not the participant is currently entitled to benefits under the contract. Therefore, such payments are an expense of the contract and not a distribution.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Rev. Rul. 84-146, 1984-2 CB 61; Let. Ruls. 9005010, 8951010.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Let. Ruls. 8432109, 8329058, 8329055, 8329049.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Let. Rul. 8747072.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Rev. Rul. 86-142, 1986-2 CB 60; Let. Rul. 8711095.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Let. Rul. 8835062.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Rul. 200507021.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Let. Rul. 9845003.<br /> <br /> </div></div><br />

<div class="Section1"><em><em>Editor&rsquo;s Note:</em></em> The SECURE Act 2.0 created new statutes of limitations (SOLs) for the penalties that apply to excess IRA contributions and missed RMDs.&nbsp; The SOLs will now start to run immediately while, under prior law, the clock did not begin until the taxpayer filed Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts (meaning that the IRS often had an unlimited amount of time to act if the taxpayer did not file the form).&nbsp; However, the Tax Court recently ruled that the new SOL on excess contribution penalties was not retroactive (so did not apply for cases where the penalty was incurred prior to the enactment of SECURE 2.0 on December 29, 2022).<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp; The case serves as a warning for clients with missed RMDs or excess contributions from years prior to 2022 that have not yet been corrected.<div class="Section1"><br /> <br /> If contributions are made in excess of the maximum contribution limit for traditional IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>) or for Roth IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3659">3659</a>), the contributing individual is liable for a nondeductible excise tax of six percent of the amount of the excess for every year the excess contribution remains in the IRA (not to exceed six percent of the value of the account or annuity, determined as of the close of the tax year).<a href="#_ftn2" name="_ftnref2">²</a> A contribution by a person ineligible to make the contribution is an excess contribution even if it is made through inadvertence.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In the case of an endowment contract described in IRC Section&nbsp;408(b), the tax does not apply to amounts allocable to life, health, accident, or other insurance.<a href="#_ftn4" name="_ftnref4">⁴</a> It also does not apply to premiums waived under a disability waiver of premium feature in an individual retirement annuity.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The penalty tax does not apply to &ldquo;rollover&rdquo; contributions to a traditional IRA or &ldquo;qualified rollover contributions&rdquo; to a Roth IRA.<a href="#_ftn6" name="_ftnref6">⁶</a> It does apply, however, if the &ldquo;rollover&rdquo; contribution does not qualify for rollover. The Tax Court did not accept the argument that an IRA created in a failed rollover attempt is not a valid IRA and, thus, the six percent penalty should not apply.<a href="#_ftn7" name="_ftnref7">⁷</a> Likewise, a failed Roth IRA conversion that is not recharacterized is subject to the six-percent penalty (the right to recharacterize IRA-to-Roth IRA conversions has generally been eliminated for tax years beginning after 2017, although recharacterizations to correct an excess contribution should remain permissible absent further guidance to the contrary).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The IRS has ruled that earnings credited to an IRA that are attributable to a non-IRA companion account maintained at the same financial institution (a &ldquo;super IRA&rdquo;) are treated as contributions to the IRA; when coupled with a cash contribution, these amounts may represent excess contributions subject to the penalty tax.<a href="#_ftn9" name="_ftnref9">⁹</a> An interest bonus credited to an individual retirement account, however, is not included in the calculation of an excess contribution.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; &nbsp;<em><em>Couturier v. Comm.</em></em>, No. 19714-16; 162 TC No. 4 (Feb. 28, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4973(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; <em>Orzechowski v. Comm.</em>, 69 TC 750 (1978), <em>aff&rsquo;d</em> 79-1 USTC &para;&nbsp;9220 (2d Cir. 1979); <em>Tallon v. Comm.</em>, TC Memo 1979-423; <em>Johnson v. Comm.</em>, 74 TC 1057 (1980).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4973(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Let. Rul. 7851087.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;4973(b)(1)(A), 4973(f)(1)(A).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; <em>Martin v. Comm.</em>, TC Memo 1993-399; <em>Michel v. Comm.</em>, TC Memo 1989-670.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; SCA 200148051.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Rev. Rul. 85-62, 1985-1 CB 153.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Let. Rul. 8722068.<br /> <br /> </div></div><br />

<div class="Section1">An individual retirement annuity is an annuity or an endowment contract issued by an insurance company that is structured similarly to an individual retirement account, but must meet certain additional requirements to qualify as a retirement plan.<a href="#_ftn1" name="_ftnref1">¹</a> An endowment contract issued after November&nbsp;6, 1978 will not qualify.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> To qualify as an individual retirement annuity, as provided by IRC Section&nbsp;408(b):<br /> <blockquote>(1)&nbsp;&nbsp; The contract must be nontransferable.<br /> <br /> (2)&nbsp;&nbsp; Contracts issued after November&nbsp;6, 1978 may not have fixed premiums.<br /> <br /> (3)&nbsp;&nbsp; The annual premium on behalf of any individual may not exceed the maximum annual contribution limit for the tax year except in the case of a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>) or a simplified employee pension (SEP) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>).<br /> <br /> (4)&nbsp;&nbsp; Any refund of premium must be applied to the payment of future premiums or the purchase of additional benefits before the close of the calendar year of the refund.<br /> <br /> (5)&nbsp;&nbsp; With respect to non-Roth individual retirement annuities, distribution must begin by April&nbsp;1 of the year after the year in which the owner reaches age 73 (72 for 2020 - 2022 and 70&frac12; prior to 2020) and the period over which distribution may be made is limited.<br /> <br /> (6)&nbsp;&nbsp; With respect to both traditional and Roth annuities, required minimum distribution requirements must be met on the owner&rsquo;s death ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> (7)&nbsp;&nbsp; Distributions must comply with the incidental death benefit requirements of IRC Section&nbsp;401(a)(9) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> (8)&nbsp;&nbsp; The interest of the owner must be nonforfeitable.</blockquote><br /> A contract will be considered transferable if it can be used as security for any loan other than a loan from the issuer in an amount not greater than the cash value of the contract. Even so, a policy loan would cause the contract to cease to be an individual retirement annuity or endowment contract as of the first day of the owner&rsquo;s tax year in which the loan was made ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The Eighth Circuit has held that a premium was not fixed when a lump sum was rolled from an IRA into an individual retirement annuity because funds taken from an IRA did not constitute a premium if used to pay for an individual retirement annuity.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Proposed regulations state that for a flexible premium annuity to qualify as an individual retirement annuity, the contract must provide that (1) at no time after the initial premium has been paid will a specified renewal premium be required, (2) the contract may be continued as a paid-up annuity under its nonforfeiture provision if premium payments cease altogether, and (3) if the contract is continued on a paid-up basis, it may be reinstated at any date prior to its maturity date by a payment of premium to the insurer.<br /> <br /> Two exceptions allow the insurer to set a minimum premium, not in excess of $50, and to terminate certain contracts where premiums have not been paid for an extended period and the paid-up benefit would be less than $20 a month.<br /> <br /> A flexible premium contract will not be considered to have fixed premiums merely because a maximum annual premium is set, an annual charge is placed against the policy value, or because the contract requires a level annual premium for supplementary benefits (such as a waiver of premium feature).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The IRS has privately ruled that a contract that includes a substantial element of life insurance will not qualify as an individual retirement annuity.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A participation certificate in a group annuity contract meeting the above requirements will be considered an individual retirement annuity if there is a separate accounting for the benefit allocable to each participant-owner and the group contract is for the exclusive benefit of the participant-owners and their beneficiaries.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> A &ldquo;wraparound annuity&rdquo; contract entered into on or before September&nbsp;25, 1981 as an individual retirement annuity will continue to be treated for tax purposes as an individual retirement annuity provided no contributions are made on behalf of any individual who was not included under the contract on that date. &ldquo;Wraparound annuity&rdquo; refers to an insurance company contract containing typical deferred annuity provisions but that also promises to allocate net premiums to an account invested in shares of a specific mutual fund that is available to the general public without purchase of the annuity contract.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Effective November&nbsp;16, 1999, annuity contracts in which the premiums are invested at the direction of the IRA owners in &ldquo;publicly available securities&rdquo; (i.e., mutual funds that are available for public purchase) will be treated as an individual retirement annuity contract if no additional federal income tax liability would have been incurred if the owner had instead contributed such amount into an individual retirement account where the funds were commingled in a common investment fund.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(b), 408A(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-3(e)(1)(ix).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(6), 408A(c)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(b)(3), 408A(c)(6).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e)(3); Treas. Reg. &sect;&nbsp;1.408-3(c).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; <em>Running v. Miller</em>, 778 F.3d 711 (8th Cir. 2015).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.408-3(f).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 8439026.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-3(a).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Rev. Rul. 81-225, 1981-2 CB 12, as clarified by Rev. Rul. 82-55, 1982-1 CB 12.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Rev. Proc. 99-44, 1999-2 CB 598, modifying Rev. Rul. 81-225, 1981-2 CB 12.<br /> <br /> </div></div><br />