If you are considering rolling over more than one IRA this year, you need to be aware of a potentially devastating outcome if you do not handle these rollovers properly.
As a refresher, the 60-day rollover rules apply when an individual receives a distribution from his or her IRA with a check made payable to the individual. In order to avoid paying taxes and a 10% early withdrawal penalty (if the owner is under the age of 59-1/2), the individual has 60 days from the date of receipt to either deposit the proceeds back to the same IRA, or place the proceeds into another IRA or other qualified plan.
Beginning on January 1, 2015, IRA owners are allowed only one 60-day rollover every 365 days. This one-year period is not based on a calendar year. In order to avoid a financial disaster, you must consider several issues before undertaking more than one 60-day rollover in a year’s time period.
A recent US Tax Court ruling from the Bobrow case changed the landscape of how the IRS enforces the 60-day rollover rules (Alvan L. Bobrow, et ux. V. Commissioner, TC Memo 2014-21, Docket No. 7022-11, Jan. 28, 2014). In this case, Mr. Bobrow was utilizing the 60-day rollover on multiple IRAs he owned. Mr. Bobrow had tax-free use of the distributed funds for almost six months before re-depositing them.
The US Tax Court struck this down, and said the 60-day rollover rules apply to all IRAs owned, and not to each one separately. The IRS changed the rules in March 2014 under IRS Announcement 2014-15.
The pitfalls (and financial pain) can come into play if the check is an indirect transfer (made payable to the individual only). This could happen if a second 60-day rollover occurs within the one-year period. The second distribution will be deemed taxable and subject to the 10% penalty if the IRA owner is under age 59-1/2. To make matters worse, if an individual were attempting to move the entire second IRA via an indirect transfer, it would effectively terminate the IRA. The full balance is taxable and the 10% penalty, if applicable, would apply.
Here are a few guidelines to consider if you want to stay clear of any rollover issues. First, if you move your IRA with a direct transfer (also known as trustee-to-trustee transfer), you will not receive the money, and therefore the one-per-year IRA rollover rules don’t apply. Also, if the IRA distribution check is made payable to the custodian receiving the funds, the IRS has said this qualifies as a direct transfer. These types of rollovers can be done as often as you wish without being subjected to the new rules. In addition, the new rules do not apply to retirement plan rollovers such as from 401(k) or 403(b) plans.
Sources:
http://www.investmentnews.com/article/20150104/REG/301049998
http://www.ustaxcourt.gov/InOpHistoric/bobrowmemo.nega.TCM.WPD.pdf
http://www.irs.gov/pub/irs-drop/a-14-15.pdf
The information provided above is obtained from publicly available sources and it is believed to be reliable. However, no representation or warranty is made as to its accuracy or completeness.
