I am a little embarrassed to admit that there are so many rules about IRAs that I find it difficult to keep them straight and I have to refer back to a guide that I have and constantly have to ask other Acropolitans if I’ve got my facts straight. There are a lot of rules, even more exceptions and getting it wrong can be costly.
A recent IRS ruling highlighted my concern when a veteran tax lawyer went to the US Tax Court about IRA rollovers, lost the case and tightened the rules for everyone else.
An IRA rollover occurs when a taxpayer withdraws assets from an IRA or Roth IRA and re-deposit’s them into a different or new IRA or Roth IRA within 60 days. If completed within a 60 day period, there are no taxes or penalties.
I’ve done this maneuver before personally, thinking that it was a fast way to transfer money from one account to another and reducing the amount of paperwork by not filling out a transfer form.
What I didn’t realize was that while there are an unlimited number of transfers between IRA accounts, you are only allowed one rollover per year. In the past, the IRS had told the public via Publication 590 that you could perform one rollover per year per IRA.
A tax-lawyer used a series of back-to-back IRA rollovers that waived a red flag with the IRS. The idea, as I understand it, is that the 60-day period serves somewhat as a temporary loan and by doing them back-to-back, the loan is extended over a much longer time period.
The IRS said that the his series of rollovers wasn’t allowed, he went to court, the tax judged ruled against the lawyer and the rule was changed so that only one rollover is allowed per year, regardless of how many IRAs you have.
I’ve seen another problem with IRA rollovers and that is when the company that is holding the IRA cuts you a check but does tax withholding. Most people don’t notice (even though it’s a 10-15 percent haircut on the balance of the account) and the remainder is rolled over as expected.
A problem arises because the amount that is withheld is treated as a withdrawal and is taxed and penalized.
For me, there are three morals to the story. First, sometimes lawyers get carried away with rule-bending strategies. I have seen some doozies over the years that didn’t seem quite right and, for the most part, they didn’t work.
Second, pay attention to the rules when it comes to IRAs. Like I said, there are a lot of them, so if you have a question, just ask and we’ll be glad to help.
Third, if you want to move an IRA, do the paperwork, take the time and do a regular transfer rather than a rollover. It’s easy to forget the 60-day deadline or get tripped up with the tax withholding. For the most part, the cost outweighs the benefit and besides – we’ll do the paperwork for you!