Rollover Blues: The IRS Drops A Bombshell

rolloversHave the rules just changed on IRA rollovers? The US Tax Court seems to say so, in a stunning tax “bombshell” that has shocked advisors, investors, and retirement and tax experts.

For years, IRS guidance suggested that investors could withdraw funds from an IRA account and roll those funds to a new IRA once per year for each IRA account, without paying tax, provided they redeposited the funds within a 60-day window.

For example, if you have three bank IRA CDs, you can withdraw each at maturity and then redeposit the funds in 3 new IRA accounts, as long as it’s within 60 days.

But with a wave of the tax wand, the Tax Court seemingly rewrote its regulations to state that only one 60-day rollover is permitted per 12-month period, regardless of how many IRAs you have. The reverberations from the decision have created the equivalent of a tax tsunami in the IRA rollover world.

Here’s what you need to know now about IRA rollovers:

The case that prompted the ruling is not representative. If you look at the actual facts, the couple that started this tempest in a teapot and eventually lost the case (the Bobrows) were clearly trying to game the system. They daisy-chained multiple IRA accounts, one to the other, in a way that made a total mockery of the IRS rules.

To add insult to injury, Mr. Bobrow was by profession a tax attorney. And, to make it worse, he decided to represent himself before the Tax Court (and we all know the saying about a lawyer who represents himself!).

I’m showing my age, but remember that TV margarine ad that warned “It’s not nice to fool Mother Nature”?

Likewise, it’s probably not wise to thumb your nose at the tax powers-that-be with such an egregious abuse of the tax rules.  It seems likely that, if presented with a different set of facts, the Tax Court would have reached a different conclusion. But for the moment, it appears that the case may indeed set precedent and cause a rewrite of all the IRA rollover rules.

Still, until this is clarified, it’s best to avoid doing any 60-day rollovers.

Frankly, we never like to see clients doing 60-day rollovers anyway. Sometimes, we are stuck with them (for example, regardless of how hard we try, we can’t seem to get a bank or other IRA custodian to properly execute the rollover via a trustee-to-trustee transfer).

A trustee-to-trustee transfer (also called a direct transfer) is always the better way to move IRA funds. That way, money is moved directly from one custodian to another, you avoid taking possession of the money, the transfer doesn’t need to be reported, and there is no risk of an adverse tax event.

How exactly do you do a trustee-to-trustee transfer? Just ask us. We’ll prepare the transfer paperwork for you, we’ll submit it through your new custodian (for example, through Charles Schwab), and they’ll do all the work for you. What we don’t want you to do is drive to your current bank or brokerage firm, ask them to cash out your IRA and hand you a check. That’s messy, time-consuming, and given the new Bobrow ruling, could lead to some very unfavorable tax consequences.

And while you are at it, you should consolidate all your IRAs to simplify your finances and streamline account management.

We have had clients with multiple IRAs held all over town. That’s just not a good way to manage your portfolio, and all it adds up to is a lot of wasted time. When you’re ready to set up a monthly retirement income flow, or start taking required minimum distributions, you’ll soon see the logic of consolidating accounts.

But again, until the rollover rules are clarified, it’s important to consolidate using trustee-to-trustee transfers, so that you never officially take possession of the IRA funds.

Relax – this doesn’t apply to rollovers when you leave your job.

Rollover terminology can be confusing, but just for the record, we’re talking about rollovers from one IRA to another, which means taking physical possession of the funds when switching from one custodian to another.

This has nothing to do with real “rollovers” from your 401(k) plan to an IRA account upon termination of employment, so don’t worry (although, in all fairness, those “rollovers” can also be messy and have bad tax consequences if you goof them up).

The takeaway: The new IRS ruling makes moving money between IRA retirement accounts a little bit trickier, so if you don’t know what you’re doing, ask for help. In the long run, it could save you anxiety and a painful tax bill.


About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!


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