At some point in your life, you’ll most likely have to complete what’s known as an “IRA rollover”. It’s a pretty straightforward concept. If you have a 401k with an old employer or an IRA with a firm and you want to move what you saved to different management, you complete a rollover. Paperwork is completed and funds are moved over to the new IRA. Simple enough, right? Usually. Rollovers are usually simple to complete, but if the ball is dropped, it can result in substantial taxes and penalties that can lead to a less-than-pleasant situation. Recently, the plot has thickened due to an IRS ruling now limiting the frequency of IRA rollovers.
To keep things simple, most rollovers are completed by way of “trustee-to-trustee” transfers. Meaning funds are sent from one institution to another, without the investor ever “touching” the money. This may happen electronically or a check might be issued to the investor, made payable to the new financial institution, not the individual. You are able to complete an unlimited amount of these types of transfers during the year.
The other type of rollover allows funds to be sent directly to you in your own name or electronically to a checking or savings account, but you must deposit the money into an IRA or eligible 401(k) within 60 days. If the funds are not deposited within the 60-day window, the distribution will be deemed as a taxable event, which could cost investors a significant amount in taxes and penalties. This type of rollover is only permitted once a year.
Rollover Short-term Loan
As my colleague, Tim Wyman, explained in a recent blog, this 60-day rollover rule could also be used for a short-term loan. So, if you were closing on a new home and needed some cash because your current home wasn’t sold yet, you could take a distribution from your IRA and, as long as you put the money back into the IRA within 60 days, there would be no tax consequences – essentially, a short-term bridge loan. Previously, the 60-day rollover was permitted once every 365 days for each IRA you own.
Stopping the Rollover Merry-Go-Round
Think about this: If you had multiple IRAs, you could feasibly take a distribution from IRA #1 and use funds from IRA #2 to pay back the first distribution within 60 days. The 60-day clock would then start over with IRA #2. If you did this every sixty days, you would only need six different IRA accounts to do the 60-day rollover “merry-go-round” and give yourself an ongoing tax-free loan from your IRA. However, the US Tax Court recently ruled that you are now only allowed one 60-day rollover every 365 days as an aggregate for ALL of your IRAs. Meaning no matter how many IRAs you have, only ONE 60 day rollover is permitted in a 365 day time period.
It seems as if our tax laws change faster than Michigan weather. There is always something new and it’s important to work with an advisor who is up to speed on the ever changing landscape in financial planning. If you ever have questions about your personal situation, don’t hesitate to contact us. We are here to help!
Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-013208