Talk about a situation where the right hand is not working with the left hand. Think about this colossal governmental mistake. For the last 20+ years, the IRS has been telling us that you can do something that now the US Tax Courts has ruled that you can’t do.
IRS Publication 590 is often referred to as the “Bible” of IRAs. It lays out all the rules regarding IRAs and it comes directly from the IRS. The entire financial industry (including tax advisors) rely on this document to tell them what you can and cannot do with your IRA.
So, you can imagine our collective surprise when the US Tax Court came down and issued a ruling that directly contradicts what Publication 590 has been telling us for years.
According to Publication 590, if a person has multiple IRAs, that person has the right to do a 60-day rollover once per 12-month period for each IRA they own. This has been published by the IRS for 20+ years.
But, the US Tax Court just ruled that the 12-month rollover rule applies not individually, but to all of your IRAs as a group.
You can read the story about how this cost one couple over $50,000 at http://www.marketwatch.com/story/ira-rollover-ruling-stuns-advisers-and-savers-2014-04-04.
So, what does this mean to you, and how do you make sure you don’t get caught?
Simply put, the easiest way for you to avoid this new IRS trap is to transfer your IRA funds directly from one institution to the next. You can still do unlimited fund transfers between institutions, as long as they maintain their IRA titling.
That means you can move your IRA from bank A to bank B to bank C to brokerage firm D and so on, provided they are all IRA accounts.
If any one of them are not an IRA account, you have used up your “rollover” and you must wait 12 months before doing another “rollover.”
The biggest lesson here is that this is an area that is super-dangerous, as it can easily lead to unintended tax bills. And when you are dealing with IRAs that are often large accounts, that unintended tax bill can be significant.
This is why you really want a retirement planning expert on your side whenever you are making decisions with your IRA. When it comes to your retirement accounts, seemingly small things can end up costing you thousands.
This reminds me of an old saying, “A little bit of knowledge can be dangerous.” If you are considering moving an IRA, 401k, or any other retirement account, make sure you get the proper advice from a specialist in this area.
For more information on how to properly roll IRA, 401k or any other retirement account, just give us a call at Wolf Wealth Advisors.