New Tax Rules for IRAs and Bitcoin
Thursday, March 27, 2014
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 31.2%, down 5.6 points
  Neutral: 40.2%, up 3.2 points
  Bearish: 28.6%, up 2.5 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

The Internal Revenue Service (IRS) recently issued announcements regarding individual retirement accounts (IRAs) and bitcoin. Since more of you have retirement savings than bitcoins, I’ll start with IRAs.

In the April AAII Journal, which will be on early next week, we introduce you to Alvan and Elisa Bobrow. This couple is responsible for promoting a change in the rules regarding when you can and cannot rollover IRA. The rollover rules allow you withdraw and redeposit funds from a traditional IRA on a tax-free basis as long as you do so within a 60-day window. Patrick Gutierrez, a specialist in employee plans at the IRS, told me some people try to take advantage of this window to get what is in effect a free, temporary loan.

I can’t speak to the Bobrows’ reasons for doing what they did, but here is the short version of the events. Between April and September 2008, the couple moved money in and out of three IRAs. The IRS, which currently allows one rollover per IRA account per year, said the Bobrows violated the rollover rules with their actions. The tax court not only ruled in favor of the IRS, but further said the tax code limits aggregate IRA rollovers to one per a 12-month period.

I hope you read that last paragraph carefully. Currently, IRS Publication 590 says if you roll over funds from existing IRA #1 to new IRA #3, you cannot make any other rollovers from these accounts during a 12-month period. You can, however, make a rollover from existing IRA #2 to new IRA #4 at any time. Just after the April AAII Journal went to press, the IRS issued a new bulletin saying that in light of Bobrow v. Commissioner, IRA rollovers will be limited to one per person per year. The new rule will apply regardless of how many retirement savings accounts a person owns. It’s not certain when the new rule will take effect, but the tax agency’s current intention is to have it take effect on January 1, 2015.

The new rollover rule will not apply to trustee-to-trustee transfers. Both Sally Schreiber, the senior tax editor at the Journal of Accountancy, and Mark Luscombe, a principal analyst at CCH Tax & Accounting, confirmed that this means you can move your IRA accounts to as many brokers as you would like over the course of a 12-month period. The key is that you move the actual account, and don’t move funds from one IRA to another. (If that sounds like a technicality, realize it is a big one.)

The new rule will not impact 401(k) plan rollovers or Roth IRA conversions. Gutierrez told me that a different part of the tax code covers 401(k) rollovers. Barbara Weltman at J.K. Lasser said Roth IRA conversions receive different tax treatment than IRA rollovers. She wrote, “The point of rollovers is to avoid tax, while conversions are taxable.”

Now on to Bitcoin.

On Tuesday, the IRS issued tax rules regarding the virtual currency. Bitcoins are now classified as a capital asset (except when held as inventory mainly for sale to customers), and not as a foreign currency. The IRS also considers “stocks, bonds, and other investment property” to be capital assets. The bitcoin bulletin (PDF) has a good question and answer section. I strongly suggest reading it if you own, transact with or mine the virtual currency.

Though bitcoin is intended to exist outside the boundaries of government, any transaction involving the virtual currency is subject to existing tax laws. If you trade, transact or are compensated in bitcoins, you must factor the transaction into your tax liabilities.

If you have any questions about the tax code, contact a professional. The amount of money you may spend working with a quality tax professional can well be worth the avoidance of an audit.

Upcoming Tax Deadlines

If you turned 70-1/2 years old last year and have not taken your 2013 required minimum distribution (RMD) from your traditional IRA or related retirement accounts, you must take it by Tuesday, April 1. You must also take your 2014 RMD before the end of this year.

Your 2013 tax return, or a request for an extension, must be filed by April 15. This is also the deadline for making any IRA contributions for the 2013 tax year. If you are making an IRA contribution, I strongly suggest writing “2013 IRA contribution for [Name] IRA” in the check’s memo field. Doing so will help protect you if the brokerage firm incorrectly codes the deposit.

Estimated first-quarter tax payments are also due by April 15.

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The Week Ahead

Just three S&P 500 member companies will report earnings next week: Monsanto Co. (MON) on Wednesday, Micron Technology (MU) on Thursday and CarMax (KMX) on Friday.

The week’s first economic report will be the March Chicago PMI. Tuesday will feature the March ISM manufacturing index, the March PMI manufacturing index and February construction spending. The March ADP Employment Report and February factory orders will be released on Wednesday. Thursday will feature March international trade data and the ISM’s March non-manufacturing index. March jobs data—including the change in nonfarm payrolls and the unemployment rate—will be released on Friday.

The Stock Trader’s Almanac says that during midterm election years such as this one, April is the seventh best month for the Dow Jones industrial average and the S&P 500 and the sixth best month for the NASDAQ, Russell 1000 and Russell 2000.

AAII Sentiment Survey

Neutral sentiment jumped to its highest level since 2005 in the latest AAII Sentiment Survey. Optimism fell and pessimism rose to levels not seen since early February.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.6 percentage points to 31.2%. Optimism was last lower on February 6, 2014. It is also the second consecutive week with a bullish sentiment reading below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, rose 3.2 percentage points to 40.2%. This is the highest level of neutral sentiment since April 14, 2005. It is also the 12th consecutive week with neutral sentiment above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.5 percentage points to 28.6%. This is the highest pessimism has been since February 6, 2014. Even with the increase, bearish sentiment remains below its historical average of 30.5% for the seventh consecutive week and the 25th time in 29 weeks.

Neutral sentiment is now at an unusually high level—more than one standard deviation above its historical average. There have only been 174 weeks with higher readings, and just 13 of those have occurred after January 1, 2000.

Bullish sentiment has fallen by a cumulative 10.1 percentage points during the past two weeks. Even with this steep drop, optimism remains within its typical range (within one standard deviation of the historical average). The recent decline in stock prices appears to continue to be moving investors from the bullish camp into the neutral camp. It is important to note, however, that bearish sentiment is only two percentage points higher than where it was at the start of this month.

Keeping some AAII members encouraged is the overall upward momentum of stock prices, earnings growth, economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates. Other AAII members are fretting about elevated stock valuations, the pace of revenue growth, the slow rate of economic expansion and Washington politics.

This week’s special question asked AAII members how much leeway they are willing to give companies for blaming first-quarter weakness on the winter weather. Half of all respondents said they weren’t going to give any leeway or only very little. Approximately 21% said the answer depends on the company or the industry, while another 21% said they are willing to give companies some or a little leeway. Fewer than 8% of all respondents are willing to give companies a lot of leeway to blame the first quarter’s winter storms.

Here is a sampling of the responses:

  • “You can only blame the weather for so long.”
  • “Very little and only with specific circumstances.”
  • “Not much leeway. Bad weather does have some effect, but bad weather occurs somewhere all the time.”
  • “I’m accepting that excuse for one quarter. Then, second quarter results have to be better.”
  • “Only when it pertains to companies that may be directly affected by the cold and snow.”
  • “Winter has been horrible for many of us, more so than in the past. I’ll give a lot of blame to the weather.”

» Take the AAII Sentiment Survey