Playing by the Rollover Rules
Since it isn’t easy to keep track of all the changes to our tax code, I wanted to bring an important revision to your attention. The United States Tax Court issued a ruling in January that will affect tax-free rollovers of individual retirement accounts (IRAs). The Internal Revenue Service has also accepted the ruling and is expected to begin enforcing new rules starting January 1st of 2015. Taxpayers could face huge tax bills if their IRA rollovers don’t comply. Here’s a quick review.
The Old Rule: Since 1978, taxpayers have been permitted to take money from IRAs, use it however they like, and then put it back into an IRA, all without taxation, as long as they followed two key requirements: 1. the re-deposit of the IRA money had to be made within sixty days of when the funds were received by the taxpayer and 2. only one such rollover was permitted for each IRA within a twelve-month period. If either requirement was not met, the entire amount withdrawn from the IRA was treated as ordinary income for tax purposes. For example, let’s say a single person, with $50,000 of annual income from Social Security and a pension, botched the rollover of his $200,000 IRA by not putting the money into another IRA within 60 days. He would owe Uncle Sam almost $60,000 in additional taxes!
New Rule: Prior to the new ruling, you could have dozens of separate IRAs and execute a rollover for each of them without a problem, as long as it had been a full twelve months since that IRA’s last rollover. The new rule changes the twelve month wait from “per IRA” to “per taxpayer.” What a difference just two words make! Back to the hypothetical “dozens of separate IRAs” . . . with the old rule, you could roll each of them, without taxation, as long as it had been twelve months since the last time you rolled over that IRA. With the new rule, if you roll over one of the IRAs, you have to wait a full twelve months to roll any of the others or you will trigger taxation.
Simple Solution: Don’t ask for IRA funds to be paid directly to you. Instead, execute paperwork to transfer the money to the new institution without it going through your hands. You can do this as often as you would like without tax consequences because the sixty-day re-deposit rule and the one-per-twelve-months limit do not apply to direct transfers between custodians. You’ll be glad you simplified the process and eliminated any chance of unexpected taxation.
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.