A recent tax court ruling now limits the frequency of IRA rollovers.
Do you like to shop around online for the best CD rates? Do you have a habit of moving certificates of deposit from bank to bank in pursuit of better yields? If you do, you should be aware of an obscure but important IRS decision, one that could directly impact any IRA CDs you own.
Pay attention to the new, tighter restrictions on 60-day IRA rollovers. This is when you take possession of some or all of the assets from a traditional IRA you own and deposit them into another traditional IRA (or for that matter, the same traditional IRA) within 60 days. By making this tax-savvy move, you exclude the amount of the IRA distribution from your gross income.1
For decades, the IRS had a rule prohibiting multiple tax-free rollovers from the same traditional IRA within a 12-month period. For example, an individual couldn’t make an IRA-to-IRA rollover in November and then do another one in March of the following year using the same IRA.1
This didn’t present much of a dilemma for people who owned more than one IRA, of course. If they owned five traditional IRAs, they could potentially make five such tax-free rollovers in a 12-month period, one per each IRA. Internal Revenue Code Section 408(d)(3) allowed that.1,2
Those days are over. Thanks to a 2014 U.S. Tax Court ruling (Bobrow v. Commissioner, T.C. Memo. 2014-21), the once-a-year rollover restriction will apply to all IRAs owned by an individual starting January 1, 2015. This year, you’ll be able to make a maximum of one tax-free IRA-to-IRA rollover, regardless of how many IRAs you own.1
If you have multiple IRA CDs maturing, you could risk breaking the new IRS rule. When a CD matures, what happens? Your bank cuts you a check, and you reinvest or redeposit the money.
When this happens with an IRA CD, your goal is to make that tax-free IRA-to-IRA rollover within 60 days. In accepting the check from the bank, you touch those IRA assets. If you fail to roll them over by the 60-day deadline, those IRA assets in your possession constitute taxable income.3
So if the new rules say you can only make one tax-free IRA-to-IRA rollover every 12 months, what happens if you have three IRA CDs maturing in 2015? What happens with the two IRA CDs where you can’t make a tax-exempt rollover?
Here is how things could play out for you. You could end up with much more taxable income than you anticipate: the money leaving the two other IRA CDs would constitute IRA distributions and be included in your gross income. If you are not yet age 59½, you could also be hit with the 10% penalty on early IRA withdrawals.3,4
Is there a way out of this dilemma? Yes. This new IRS rule doesn’t apply to trustee-to-trustee transfers of IRA assets. A trustee-to-trustee transfer is when the financial company hosting your IRA arranges a payment directly from your IRA to either another IRA or another type of retirement plan. So as long as the bank (or brokerage) serving as the custodian of your IRA CD arranges such a transfer, no taxable event will occur.3
Speaking of things that won’t change in 2015, two very nice allowances will remain in place for IRA owners. You will still be able to make an unlimited amount of trustee-to-trustee transfers between IRAs in a year, as well as an unlimited number of Roth IRA conversions per year.1
Mike Moffitt may be reached at ph. 641-782-5577 or email@example.com.
Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion form a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule [5/14/14]
2 – bna.com/announcement-clarifies-inconsistency-b17179889881/ [4/24/14]
3 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions [4/21/14]
4 – bankrate.com/financing/cd-rates/cd-ira-owners-beware-of-new-rule/ [9/2/14]