The world of financial planning can be very complex, especially when you factor in IRS rules. Recently, the rules that most people were operating under were changed by a tax court ruling. It seems that an IRS publication and the tax court had different interpretations on what we could or couldn’t do with our IRAs.
If you want to move your IRA, there are two ways to do it; a transfer or a rollover. Although they may seem similar, they are very different, and if you move money incorrectly, the consequences could be disastrous.
A rollover occurs when the IRA owner takes receipt of the money. A transfer is where money goes directly from one IRA custodian to another IRA custodian. In almost all cases the best way to move an IRA is the transfer way.
A rollover is an exception to the normal rule that IRA distributions are taxable in the year the distiction is received. In a rollover, the IRA owner takes receipt of a distribution from his or her IRA and deposits the money either into another IRA or back into the original IRA.
• When can you qualify to roll over funds from one IRA to another?
If a person receives a distribution from an IRA, they can roll over these funds by depositing them into an IRA if, (1) the funds are rolled over within 60 days after the day the funds are received; and (2) they have not rolled over another distribution from an IRA within the last year. The 60-day period and the one-year period begin on the date the taxpayer receives the distribution.
• What if I have multiple IRAs; does the one-rollover-per-year rule apply to each IRA separately?
No! In Bobrow v. Commissioner, T.C. Meno 2014-21 (1/28/14), the tax court ruled that the one-year waiting period applies to the IRA owner not each IRA individually. This is a new interpretation of the rule, and it will take effect in 2015.
Historically, tax practitioners understood the one-year waiting period to apply to each IRA separately, meaning if a taxpayer owned multiple IRAs, they could make a 60-day rollover from each account within the same year. Until recently, taxpayers had reason to believe this was the proper interpretation because the IRS explicitly stated that this was the rule in Publication 590.
• Is there any limit to the amount of a rollover?
No. There is no dollar limitation on the amount of a rollover.
Can you do a rollover past the age of 70-and-one-half?
Yes. Although an individual must stop making annual traditional IRA contributions in the year they attain age 70-and-one-half, a rollover of any non-required distributions is permitted.
What is an IRA transfer?
A transfer occurs when money is sent from one IRA custodian to another without the owner having receipt of the money at any point. The old custodian generally issues a check payable to the new custodian on behalf of the new owner’s IRA. Information must be provided to the old custodian, including the account number and other identifying information about the new IRA receiving the funds. If the recipient of the funds is a new IRA, it must be established prior to the transfer.
• Will there be income tax withholding on a transfer?
No, there is no withholding on a transfer.
Needless to say, there are more rules than you can shake a stick at, and you had better get it right if you want to move the money. Again, in most cases, you will want to move the money via a transfer, not a rollover; and because the penalties and consequences for doing this incorrectly can be severe, the best advice is to work with a very qualified advisor that can do all the proper paperwork with you.