By Andy Ives, CFP®, AIF®
ret·ro·ac·tive | extending in scope or effect to a prior time or to conditions that existed or originated in the past; especially: made effective as of a date prior to enactment, promulgation, or imposition.
I like that word, and it’s fun to say. Retro-active. Plus, it is powerful. Making something retroactive gives one the ability to reach back in time and change things for better or worse. “Retroactive to January 1 of this year, all employees earned a weekly $100 bonus.” Or, “Retroactive to last Monday, the speed limit on Main Street is reduced to 25 mph from 35 mph. Any driver who exceeded 35 mph from then forward will receive a speeding ticket in the mail.”
“Retroactive” is a superpower that occasionally rears its head in the retirement world and can turn back the hands of time:
Spousal Rollovers and RMDs
Clark died in November and left his IRA to his loving wife Ellen. Ellen, age 75, elected to do a spousal rollover with Clark’s IRA money, and the transaction was finalized the following March. When a spousal rollover is completed, the decedent’s IRA is moved into the surviving spouse’s IRA, and the assets are treated as if they belonged to the surviving spouse all along. But now Ellen needs to calculate her RMD for this year. Clark’s IRA did not roll into Ellen’s until March, so her December 31 prior-year balance will not reflect the spousal rollover. What to do? The spousal rollover is deemed to have been done retroactively so as to include Clark’s balance in Ellen’s IRA for RMD calculation purposes.
John started a 72(t) substantially equal periodic payment plan from his IRA when he was 57. Rules dictate the plan must run for five years or until John is 59 ½, whichever is later. John is now 60 and decides to stray from the schedule by withdrawing more than required. Any deviation or modification of the 72(t) will trigger a retroactive penalty whereby all distributions prior to age 59 ½ will now be subject to the 10% early distribution penalty.
The Sveen v. Melin and Blalock v. Sutphin court cases both involved revocation-on-divorce statutes in their respective states of Minnesota and Alabama. These statutes essentially remove an ex-spouse as beneficiary of an account after divorce, even if the beneficiary form has not been updated. While both the Minnesota and Alabama statutes were passed after the accounts in question were opened, the Courts ruled that retroactive application of the laws would not impair any pre-existing contracts.
Prohibited IRA Transactions
Prohibited IRA transactions are nothing to trifle with. They are the granddaddy of IRA errors. If you engage in a prohibited transaction, the entire IRA is disqualified retroactive to the first day of the year and is treated as being fully distributed on January 1. Not only is the distribution likely to be fully taxable, but it can be further subjected to the 10% premature withdrawal penalty.
“Retroactive.” There should be a Marvel comic book hero or villain with that name.