IRAs will be lost this year to new restrictive IRA rollover rules. Make sure you know them and are on the lookout for potential retirement disasters. The last thing an advisor needs is to have to tell a client that the attempted IRA rollover has turned what should have been a tax-free rollover into a massive unexpected tax bill.
Beginning January 1, 2015, IRA owners can only do one 60-day rollover per year, for all of their IRAs. The rule no longer applies separately to each IRA. For this rule, IRAs include, traditional IRAs, SEP and SIMPLE IRAs and Roth IRAs.
The one-year period is not a calendar year; it’s 365 days, or 12 months. If a second rollover is done within the one-year period, it’s ineligible to be rolled over. The distribution will be taxable and subject to a 10 percent early withdrawal penalty if the client is under age 59½.
If a client attempts a second rollover, the problem cannot be fixed. The IRS does not have the authority to help correct the situation. Moving an entire IRA balance to a new custodian or to a new advisor could end a client’s IRA.
It gets worse. If the client does a second 60-day rollover, not knowing it can’t be done, it’s now not only taxable, but also an excess IRA contribution, subject to a 6 percent penalty every year the ineligible rollover funds remain in the account.
There are two ways to move IRA money to another IRA: directly and indirectly. Always move IRA funds directly if you can.
A direct transfer, also called a trustee-to-trustee transfer is when the IRA funds move directly from one IRA to another without the client touching the money in between. These can be done as often as you wish, without worrying about the once-per-year IRA rollover rule.
With the other method of rolling over IRA funds, an indirect transfer, also called a “60-day rollover,” clients receive a check from their IRA made payable to them personally. They then they have 60 days from the date they received it to re-deposit those funds — roll them over — to another IRA, or back to the same IRA.
Avoid this indirect, 60-day rollover, like the plague. This technique surfaced as a result of the now famous “Bobrow” tax court case about a year ago. (Alvan L. Bobrow, et ux. v. Commissioner, TC Memo 2014-21, Docket No. 7022-11, January 28, 2014).Before then, the published tax rules (in IRS Publication 590) allowed the once-per-year rule to be applied separately to each IRA.
In the Bobrow case, the court believed that Bobrow, who was a tax attorney, was taking advantage of the 60-day rule for each IRA. Bobrow had done a series of rollovers from separate IRAs and had use of his IRA funds for almost 6 months.