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What You Need to Know About The New IRA Rollover Rules

What You Need to Know About The New IRA Rollover Rules

A new rule regarding IRA rollovers that took effect in January has put a damper on some folks’ saving strategy.

The rules allow a taxpayer to withdraw IRA assets from a traditional or Roth IRA and redeposit the funds into a similar account within 60 days without owing taxes or being subject to penalties.

However, in the case of Bobrow v. Commissioner of the Internal Revenue, the court determined that the taxpayer can only complete one rollover per 12 month period. Bobrow, a veteran tax attorney who was arguing his own case, contended that IRS publication 590 indicated that taxpayers can do one rollover in a 12 month period per IRA; meaning a taxpayer could rollover multiple IRAs during a 12 month period, as long as they are separate accounts.

"Mr. Bobrow was taking a sum of about $50,000-$60,000 per 59 days and using it as a free loan, for some reason the final time he did this, it was with his spouse’s account, and it didn’t process until 61 days, this was a default situation, and when explored further, it was deemed that his continual habit of rolling over like this was not in the spirit of the rules," explains Matthew Hague, principal of Guide Wealth Management. "The new rule was designed to stop what was perceived to be an abuse of the 60 day rule, where you could withdraw (and have access to) funds from one IRA and hold this for 60 days prior to assigning it to a new IRA."

So blame Bobrow. Some people are none too happy. Those who have several IRA CDs from different banks and credit unions to maximize their interest rates may find it harder to transfer to other IRA CDs at other institutions, causing them to miss out on good IRA CD deals.

To sort out any confusion, direct trustee to trustee transfers remain limitless. "If you wanted to rollover from Fidelity to Vanguard directly, without touching the money, you can do that without being subject to the rules. It only applies if you want your old custodian, say Fidelity, to send you the cash and you use it for 60 days before sending it to the new custodian, Vanguard," explains Hague.

What’s at stake?

CDs are suddenly tricky. The biggest concern area, says Jamie Hopkins, a professor of retirement and associate professor of taxation at The American College is CDs. "CDs are the riskier investments in an IRA now because a lot of banks have automated the CD maturity process for IRA accounts and pay out the mature CD directly to the IRA owner."

In the past, the owner could roll it over within 60 days to a new IRA or the same IRA without issue. "If you do this twice in a year, then one of those mature CDs will not be able to go back into your IRA. This could cause you to lose the tax benefits of the IRA, as you will owe taxes today and won’t be able to get that money back into the IRA for retirement. Failing to pay attention to this rule could cause you to lose a large portion of your IRA to taxes and lose the ability for future tax deferred investment growth inside of your IRA."

"If Mrs. Taxpayer wants to consolidate her five CD IRAs into one IRA and she cashes the CDs and has checks issued to her and then re deposits them, this would violate the rollover rule. All of those excess transfers would be 100% taxable within the year and it will catch many people off guard and require a huge tax liability come next April," says Pat Simasko, an elder law attorney and founder of Simasko Law.

The most important takeaway under the new rule, and potential trap for unsuspecting savers, is that a second rollover cannot be reversed.

The most important takeaway under the new rule, and potential trap for unsuspecting savers, is that a second rollover cannot be reversed, says Thomas Walsh, an investment analyst with Palisades Hudson Financial Group. IRAs have a lot of rules, but if you make a mistake, most of them can be reversed. For example, excess IRA contributions or mistaken IRA conversions can be reversed, and penalties on missing a required minimum distribution can be waived if you show reasonable cause, he says.

However, once the check is issued for a second rollover within a 12 month period, there’s no clear way to put things back the way they were. "This may be addressed by the IRS in the future, but for now, a second rollover within 12 months would mean the entire rollover amount becomes taxable, and could also be subject to penalties if you are under age 59 ½."

Is there a silver lining in this dark cloud? "In many ways, limiting to direct transfers reduces the risk of human error, like the one where Bobrow didn’t manage to complete his final rollover within the 60 day window," says Hague.

Ryder Taff, portfolio manager of New Perspectives sees an upside, "Some people take money out just to use for every day expenses, which is very harmful for their financial plans. This rule should cut back on that bad practice."

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Anonymous   |     |   Comment #1
Interesting stuff.  It was so many years ago that I no longer can recall exactly when it was.  I've lost track.  But long ago I consolidated all my IRA money into a single IRA CD.  This was especially helpful when opportunity presented itself to "Roth" all the money . . which I did . . also a great many years ago.  So far:  no regrets.  The future?  Who knows what stunt government will pull next regarding IRA funds, so I cannot say.
Anonymous   |     |   Comment #2
Good article, thanks for the update.
Anonymous   |     |   Comment #3
Paoli2,  How does this affect you with your multiple CDs?
Anonymous   |     |   Comment #4
I'm not sure people realize the government has a tax lien on 401k's and IRA's and that means greater control of your present activities.

There's a big difference between one million in tax-free cash and a million dollar 401K/IRA subject to future taxation. Depending on your tax bracket the difference can be quite significant. My 1M cash has the purchasing power of 1M. A 1M 401K might only buy 750K worth of goods and services. The math is simple but most people never do it. Trust me, the IRS does.
Anonymous   |     |   Comment #17
No big mystery.  Money in a 401K is tax deferred.  Taxes to be paid when the money is withdrawn from the account.    The principal deposited in a tax-free cash account has already been taxed and any subsequent earnings as in a Roth IRA are non-taxable (tax- free).

Very basic financial common knowledge.
mr. know it all
mr. know it all   |     |   Comment #5
This rule and my growing old (now required to take RMDs) has forced me to consolidate all my IRAs in one Brokered Account.

I still invest in CDs(brokered CDs).  And they do not offer rates as good as Banks CDs.  BUT, as they mature, they stay in the IRA.

I don't like that they vary in valuation--the agony of defeat as you look at the CD and its worth LESS.  BUT, hold to maturity and they come back to PAR.  The interest is paid directly into the brokered cash account.  So, where at one time I had 10 individual FDIC bank IRA CDs, as they mature I am diligent in effecting DIRECT transfers to my broker and consolidating. 
Anonymous   |     |   Comment #6
Thanks for the clear explanation of the change in rules.
Anonymous   |     |   Comment #7
The problem with the new rule is that it was applied to Bobrow.  If the IRS wanted to changed the rules, they shouldn't do it retroactive as to him.  Further the IRS lawyer in that case was arguing for the court to disregard the then IRA rules and find against Bobrow!  The IRS is the problem...they should change the rules and then apply them prospectively.  Bobrow may have used the system BUT it was the then IRS system which was created by the IRA.  Shame of IRS and their counsel!
Anonymous   |     |   Comment #8
Mr. Know it, yours is a very interesting post.  Thank you for making the point about potential complications with RMD's when holding multiple CD's at multiple banks or credit unions.

Do RMD's have to come from each CD at each institution or can the correct amount be consolidated in some fashion?  Your further comments would be appreciated.
Anonymous   |     |   Comment #9
My retirement funds consist of all IRA's traditional and Roth. Before reaching 70 1/2 I socked away all the government allowed me to put from Traditional IRA's into Roth IRA's. I found that  for me it made a portion of my retirement funds tax free.. I paid the tax but it was done according to IRS tax laws. Since then I have almost 50% in Roth IRA's.

I find the new laws more difficult to follow. Since I would have the funds, that mature, sent to me I had 60 days to rollover and select where to put the money. Now I am at the mercy of selecting a rollover institution within the usual 10 day grace peroid, or putting the funds in a liquid account so they don't rollover to less desirable rates. I never used, deposited any or portions of the funds, why do I have to pay for someone else's abuse?

I have an accountant who tells me what my RMD for the year will be. Based on the full value of my retirement account. I remove those funds the last week of December, of the year it is due. I then take advantage of the interest for the year. Yes, you can remove all the RMD funds from one or more institutions at any time during the year it is due.

I am hoping they will reverse the new policy for IRA's as the banks and credit unions have taken advantage of the situation and float the funds between the old and new institutions.
Therefore I am losing interest and being charged a fee for bank to bank transfer. The old way I received a check and there was no fee.
Anonymous   |     |   Comment #10
In most cases, I do a wire transfer when doing a direct IRA transfer to another institution.  That way, the transfer happens more quickly and you minimize the amount of interest that you lose.
Anonymous   |     |   Comment #11
It always have been much cleaner to use trustee-to-trustee transfers to move IRA money.

The article says: "...a lot of banks have automated the CD maturity process for IRA accounts and pay out the mature CD directly to the IRA owner"
My experience with non-IRA CDs is that institutions automatically open a new CD of the same term as the last one at whatever the current rate is at the time of maturity - unless you instruct them otherwise.

Anyone have specific examples of banks or CUs that just send you a check at IRA CD maturity?
Ira Seadee
Ira Seadee   |     |   Comment #13
 Ally bank and Penfed both have IRA Money market accounts.  I woulds assume most or all banks do as well.  Why would they cut you a check unless you failed to request it be moved into a new CD or their IRA Money market/savings until you either open  new CD at the same bank or trustee transfer it out.
Anonymous   |     |   Comment #14
Another option instead of receiving a check from a maturing IRA CD.

You do not have to have a savings or money market account set up for depositing matured IRA CD funds.  Just be sure the institution receives your transfer documentation  before the cd matures with instructions on where the funds are to be transferred.  If the institution approves faxing IRA transfer documentation, then I prefer this over mailing since it gets there quicker and you get verification from the fax that they have received it.

When the IRA CD matures, the matured amount is then directly transferred to the new institution.  
Anon456   |     |   Comment #16
I agree with Comment #14.  I have found some organizations these days that will work off a fax rather than wet ink (original documents) copies.  WARNING - do not provide instructions to your existing IRA holder directly.  Those instructions for the transfer MUST come from the new receiving organization.  WHY??  - - because without them signing the documents that say they will be the NEW TRUSTEE, then your current IRA holder may code the transaction as a distribution since they do not know for sure the funds are being directly transferred into another IRA account.  Used to be OK under the old 60 day rule, until this latest IRA ruling.  It's OK to let them know that they will be receiving instructions, BUT THE INSTRUCTIONS are not from you.  Must be from the receiving organization authorizing the transfer as the new trustee.
Real   |     |   Comment #42
At the end of the day, I copy the check which is payable to the new trustee...what the old trustee does is based, in part, on their level of tax knowledge. Wait until you do a qualified charitable distribution and the 1099s...I usually put a copy of the receipt from the charity which states it is a qcd, etc.
LuvCD   |     |   Comment #43
Anon456 ...you posted a question on marriage cert on forum...which I can reply to.

Suggestion. Why not merely open new accounts with new names on IDs? Trust would be also an option
Anonymous   |     |   Comment #12
IRS publication 590 is quite clear that you don't have to take your Traditional IRA RMDs from each account - you can pick one or more accounts to pull from.
Anon456   |     |   Comment #15
These are my comments from having researched this many times, and I have done maybe 40 or more of these over the years.  I learned the hard way that transactions which should have been coded correctly were not by one or both of the organizations.  Good luck at tax time if that happens.

You are welcome to try some short cuts, but don't say you were not warned.  The IRS is not flexible on these issues.

NOTE - comments such as WIRE TRANSFERS may get you in trouble.  BOTH institutions will need to report the transaction as a trustee-to-trusttee move, else it will end up looking to the IRS as a rollover or distribution.  Many institutions cannot do IRA funds to IRA funds via a wire, without first putting the funds into a taxable holding account for the wire transfer.  That will NOT end up a direct trustee-to-trustee transaction even though you never touch the money.  Money must go from IRA account to another IRA account without even temporarily going into a taxable holding account.

Always start the process with the new receiving organization using their direct transfer forms which are signed by you, and them, and then forwarded to your existing IRA holder.  Keep copies of those forms.  IF there is an oops on the coding of the transaction, it may be the ONLY thing that may help with the IRS.

Lastly, I always get the name of a manager or senior account manager at each organization as I do the transfer, and make sure they will be handling and coding it as a DIRECT trustee-to-trustee transfer.  You may get a front office worker who says it will be, only to find out later that the back office codes it incorrectly as a distribution (rollover).
Anonymous   |     |   Comment #18
I have done approximately 10 IRA wire transfers and never once were they classified as a distribution.  However; I made sure that my IRA transfer documentation always specified that it was going to be a trustee to trustee transfer and not a rollover. 

Your point about the IRA funds going into a taxable account first before being wired.  What account would it be going in if you did not have a taxable account with that institution?
Anonymous   |     |   Comment #19
Maybe open an IRA savings account, or an IRA money market account, or an IRA checking account, etc?
Anon456   |     |   Comment #23
I believe most all institutions can do a wire, but some cannot or will not wire IRA funds.  Found this out from PENFED a few years back.  They will wire, but move it into a WIRE account (which is a taxable account).  So they basically say they will not WIRE IRA funds as a trustee-to-trustee.  I am sure this is the case with some other organizations as well.

In the past, some may gotten away with it because it was coded as a rollover distribution (reportable, but not taxable) under the 60 day rule.  Those days are gone if you do more than one a year, even from different institutions..
Anonymous   |     |   Comment #30
Suppose you only have IRA accounts at Penfed and do not have a taxable account.   How can Penfed transfer and wire the IRA funds from a taxable account that you do not have?
Anon456   |     |   Comment #31
Good question, but it is my understanding that PENFED moves money to be wired out into their own bank to bank wire account just for that transaction.  That is why they say they cannot (or will not) wire IRA funds.  I am sure that some places do transfer IRA funds via wire, but apparently not all places do.
lou   |     |   Comment #20
The IRS sucks.
lou   |     |   Comment #21
Thanks for making a stupid process even harder.
Anonymous   |     |   Comment #22
Leave it to a lawyer to push the limits!
Anon456   |     |   Comment #24
The odd thing is that the lawyer argued that the IRS PUB allowed it.  But tax ruling said no, regardless of the IRS PUB.  So that means even if you follow the IRS publication information, the IRS may later come back (using the IRS CODE) to override their own PUBS.  Does not seem right, does it?
Anonymous   |     |   Comment #25
No it doesn't.  I've talked to the IRS and the first thing they say is a disclaimer to what their telling you.  Why bother calling?
Anonymous   |     |   Comment #26
Better to ask for forgiveness than permission!
Anonymous   |     |   Comment #27
The Pub was IRS policy...why is their atty arguing against that which the client (IRS) sanctioned?  Again, the IRS should have promulgated a proposed rule, adopted it, etc. and everything is right!  The attorney should ethically look in the mirror and resign!!
mhh Coral Springs Florida
mhh Coral Springs Florida   |     |   Comment #28
There is a band aid approach to this IRA Rollover Problem.
If the C.D. with a Credit Union, and from my experiences, the credit unions I have joined, a savings account is the "membership vehicle" in order to join.
Therefore in the case of the C.D. that matures but the timing is wrong to Rollover or Re-Invest into another C.D. the savings account is a simple way to park the funds without flirting with the New Rollover Rules. This can also give U time to align other C.D's from other institutions if need be.
I am confident, that even the crappy and inconsiderate "Big Banks" can accommodate this strategy.
Coral Springs, Florida  
Anonymous   |     |   Comment #29
Only if it is an IRA savings account
RJM   |     |   Comment #32
That guy was abusing it.  I started my IRA almost 30 years ago with a mutual fund. I later transferred it to a brokerage and then another. Never once touching the funds.

Limitless 59 day penalty free loans were clearly not intended to be allowed.
lou   |     |   Comment #33
Allowing one 60-day rollover per year is a major hardship for people who have many IRA accounts. If you want to stop the abuse of limitless 59-day rollovers, then allow no more than five 60-day rollovers per year or shorten the rollovers to 15 days. Instead of a logical solution which would be convenient for taxpayers, the IRS has to impose the most inconvenient and irritating rule imaginable. Another case of our govt hassling real people trying to do the right thing for no good reason. 
Anonymous   |     |   Comment #34
Not only has the government now added a new problem for managing IRA accounts by the one rollover per year rule, but they have also ****ed up my health insurance options for year 2016.  In 2016, BCBSTX will only offer HMO plans, and guess what, there is only one HMO primary care physician in my area and he is not accepting any new patients.  Very few doctors and hospitals accept the HMO plan also. 

Even though I pay my entire premium without any aid from the government, it is looking like I may be stuck with the worthless HMO plan because there is no other insurance carriers offering PPO plans in my area.  Thanks to the great Obamacare plan.
Anonymous   |     |   Comment #35
Obamacare is and was about one and only one thing. Create enough complexity and confusion so that people raise their hands in capitulation and say, "we surrender, give us the SINGLE-PAYER system and be done with it." That's the goal; that's always been the goal.
Anonymous   |     |   Comment #36
ACA was a compromise (not by "party" but by those that would accept a form of healthcare "reform"), i.e. involve the private sector too (if not all the democrats would not have supported same...and thus "defeat" at that time).  The Ins. companies were the "pony/vehicle" part of that...w/o them, there would not have been a deal (notice how many ins companies "luv" ACA--all!  The VA single payer system was/is a non-starter from the get-go.  However, from an ultimate cost point of view, a single system is more viable but the votes were not there.  The Republicans (disclosure:  I'm registered as such), unfortunately, have not offered a bill to replace ACA but would just like to say "no."  However survival  of the ...is not a 21st century solution."
lou   |     |   Comment #37
There have been many proposals to replace Obamacare by Republican legislators, although not a consensus bill by Congress. Really, what's the point, any bill to replace Obamacare will be vetoed by Obama. Need to replace Obama before we can replace or seriously reform Obamacare.

The only people who like Obamacare are those who get it for free or almost free. If you don't have employer-provided insurance and have to pay the full freight to purchase Obamacare (an insurance plan most doctors won't take) I can assure you that you're probably not a happy camper.
Anonymous   |     |   Comment #38
We purchase our non-ACA insurance to the tune of $15,000 per year. That does not include dental or vision, which are extra out-of-pocket costs. When we go on Medicare in a year our annual cost will be approximately $12,000. There's not much difference and, though I have been against single-payer for a long time I no longer am. The insurance companies control costs, access and ultimately service. I've wasted enough time and money on them. If Americans can't create an excellent single-payer health care system no one can. I believe we can and will.
lou   |     |   Comment #39
"If Americans can't create an excellent single-payer system, no one can."

The answer is no one can. It has never been done in the history of mankind. Single-payer systems mean long waits for elective surgeries and inferior medical care. What saved the Canadian system is that Canadians could come to the US when they needed timely medical care which they couldn't get in their country. Ask the Premier of Newfoundland.
Anonymous   |     |   Comment #40
Hmmm...how did a discussion re new IRS regs regarding IRS rollovers turn into A ACA rant???? Second thought, don't bother respomding...I see where this is headed.

1 guy, pulls a bone head stunt and the IRS changes a 30 year rule....And, btw, the new IRS-IRA regs, do allow you to get a check for a maturing CD, as long as the check is payable as per: "New Trustee Name F/B/O IRA.  That is "for the benefit of".  This is still a Trustee to Trustee xfer and not a distribution...This can be helpful is you have a small time window to lock in a benefical rate at the new Trustee institution.  But, the comment (above) is 100% correct, have the NEW IRA trustee, a few days in advance prepare the xfer paperwork to present to the OLD Trustee.  BTW, Synchrony Bank, in their online forms section, has an excellent forms package that is well worth reading.
Linda   |     |   Comment #44
we have a 401K. My husband really needs to retire, however, we still have a mtg of $230,000. We would like to pay it off before retirement. Should we use the 401K $ to pay it off?
LuvCD   |     |   Comment #45
I paid mine years before retirement thus less retirement funds needed. Suggest you talk to a qualified person, e.g. fee only, on various scenarios especially when only one is alive
Bogey   |     |   Comment #46
Linda, don't forget you will have to pay federal income tax on any money you withdraw to pay off your mortgage from that 401K. So you would have to withdraw a lot more than $230,000 to pay off the mortgage.