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New Rules for IRA Rollovers

The Briefly Noted column in the April 2014 AAII Journal discussed a tax court ruling affecting individual retirement account IRA rollovers (“Be Aware of IRA Rollover Rules”). As a recap, Alvan and Elisa Bobrow moved money in and out of three IRAs between April and September 2008. The Internal Revenue Service IRS, which currently allows one rollover per IRA account per year, said the Bobrows violated the rollover rules with their actions.

The rollover rules allow you to withdraw funds from a IRA on a tax-free basis and deposit them into another IRA as long as you do so within a 60-day window. Patrick Gutierrez, a specialist in employee plans at the IRS, told us some people try to take advantage of the window to get what is in effect a tax-free, temporary loan.

The tax court not only ruled in favor of the IRS and against the Bobrows, but further said the tax code limits aggregate IRA rollovers to one per 12-month period. Just after the April AAII Journal went to press, the IRS issued a new bulletin saying that in light of Bobrow v. Commissioner, aggregate 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. The tax agency’s current intention is to have the rule take effect on January 1, 2015. Look for the new rule in the 2015 edition of IRS Publication 590, unless there is a delay.

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 between brokers as many times 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 us 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.”

Source: “Application of One-Per-Year Limit on IRA Rollovers,” IRS Announcement 2014-15; “New Tax Rules for IRAs and Bitcoin,” AAII Investor Update, March 27, 2014.


Discussion

James W. from CA posted 11 months ago:

I would appreciate further clarification as this comment from the article seems like it is not correct: "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.)"

That implies that moving money or holdings between identical IRA's at one brokerage firm counts as a rollover. However, in my experience the journal of assets between identical IRA's (rollover to rollover, Roth to Roth, etc.) at the same brokerage firm is not a rollover. Instead, it is a combining of accounts and is not re-portable in any way. Isn't the entire issue as to rather or not a 60 day rollover is in effect or not dependent upon the money coming out of an IRA and going into the hands of the recipient? That is the only way a "loan" could be created and that is what the IRS is trying to avoid in excess. I don't see how moving directly between IRA's at one firm is any different from transferring between firms. As long as the money does not come directly payable to me I believe no rollover has been created even under the new rules pending for 2015.

I'm not stating the above as a fact. Rather it is to request clarification as to rather or not my thinking is correct. If moving money directly between identical IRA's becomes a problem this issue is a much bigger problem then many think. For example: those of us with portfolio managers would become much more limited in moving funds between managed and non-managed IRA's at the same brokerage firm. That just does not make any sense to me.


Charles Rotblut from IL posted 11 months ago:

Hi James,

You are correct. The tax rules are designed to prevent people from taking advantage of the 60-day window to get what is effectively a free short-term loan.

I added the part about moving an account from broker to another to clarify what is and what is not allowed.

-Charles


Christophe Couallier from FL posted 11 months ago:

Thank you James for bringing this up. Good point to clarify.

Let's take an example and see if we are clear.

Say you have an IRA account with 5 funds at broker1. You transfer (partial or in full) the account holding to another existing IRA account at broker2. We agree this is a transfer and not a rollover, correct?

Now, in the process of the transfer, you want to liquidate your funds at broker1 and thus transfer to the other IRA at broker2 the cash proceed from the sale. Is it still a transfer or a rollover?

Finally, once the cash is in the IRA at broker2, you purchase 5 different funds. This would be neither a transfer nor a rollover, but a simple transaction similar to a rebalancing.

Do you concur with the analysis or have I missed something?

-Christophe


James W from CA posted 11 months ago:

Hi Christophe,

I agree with all of your points. None of your example transactions are rollovers.

Hi Charles,

Thank you for the clarification.


Gary from CT posted 11 months ago:

Hi Charles - As a further example / clarification - If I had a traditional IRA at Broker 1, and they had poor short term CD rates and charged for buying Vanguard funds; and I wanted better short term CD rates and access to no fee Vanguard funds, could I open an IRA at Vanguard and another IRA at Discover Bank, and then transfer 1/3 of my funds from Broker 1 to Vanguard, and 1/3 of my funds from Broker 1 to Discover Bank (leaving the last 13 of my funds at Broker 1), and not have any IRS problems?


Bruce Austin from Nc posted 11 months ago:

Does this also include moving funds from a past employee 401-k to a personal IRA?


Charles Rotblut from IL posted 11 months ago:

Hi Bruce,

My understanding is no if the 401(k) is still held through an old employer's plan.

-Charles


Gary Pierce from CT posted 10 months ago:

Thank you. Seems like I have to examine this more closely.


Fred S from MI posted 9 months ago:

Back to the original further clarification requested by James regarding the paragraph stating:

The new rollover rule will not apply to trustee-to-trustee transfers. Both .... confirmed that this means you can move your IRA accounts between brokers as many times 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 insinuation is there is some technicality that says there will be taxable consequences for anything less than a full account transfer between trustees.

Is this what is really meant? and if it is, where is it in the IRS publications?


Lynn Abell from MD posted 11 days ago:

My parents have CD's in their Roth IRA held by a local bank (yes, I've told them it's not the best idea to do this), so I initially thought there wouldn't be an issue, since there is no taxable event.

However, an article I read in Kiplingers Retirement Report (Aug 14, pg 11) implies this would be a problem:

Avoid Rollovers of IRAs Held at Banks
It’s not unusual for a retiree to own multiple IRA certificates of deposit at once. When one CD matures, the bank will likely close the IRA and hand you a distribution check. You then roll the money into a new IRA CD, often at another bank that’s offering a higher interest rate. You repeat the process when the next CD expires. A new court ruling, however, can foul up the process.

Until recently, if you owned more than one IRA, you could roll over each one once a year. As long as you completed the switch within 60 days of the payout, there was no tax. Now, thanks to a U.S. Tax Court opinion, such IRA CD rollovers could be “very risky” for older investors, says Natalie Choate, an estate-planning lawyer with Nutter, McClennen and Fish, in Boston.

The court ruled that the once-a-year rollover limit applies to the investor, not to the individual IRA. No matter how many IRAs you own, only one rollover is permitted in any 12-month period. The IRS announced it will not enforce the ruling until 2015.

You can avoid trouble by using direct IRA-to-IRA transfers rather than 60-day rollovers. With a transfer, the first bank with the maturing CD sends the money directly to the second bank, and you are never in possession of the money. “You can make as many direct transfers in a year as you want without any worries,” says Jeffrey Levine, IRA technical consultant with Ed Slott and Co., in Rockville Centre, N.Y.

To use the direct-transfer method, first find out when your CD matures. Then find a bank with a better rate. Before the old CD comes due, open an IRA at the second bank and ask about any paperwork you must fill out to transfer the money. Make sure the second bank does not send the paperwork until the CD matures, or you’ll likely pay an early-withdrawal penalty. If you want to stick with the same bank, ask about its transfer procedure.

Although the IRS says it will hold off enforcing the new rule, Levine encourages IRA owners to follow it immediately. It’s unclear when the 365-day clock begins. For instance, if you do a rollover in September this year and then another in March, it’s possible the IRS could look at the March rollover as the second one in the 12-month period. K —SUSAN B. GARLAND"


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