Moving Your IRA Funds? Learn These 3 Lessons From Others' Mistakes | Ed Slott and Company, LLC

Moving Your IRA Funds? Learn These 3 Lessons From Others' Mistakes

By Sarah A. Brenner, IRA Technical Expert
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Thinking about moving your IRA funds? A recent Private Letter Ruling (PLR 201527050) issued by the IRS provides some useful lessons. A taxpayer requested this ruling from the IRS after she failed to complete an IRA rollover within the 60-day time period. She believed, based on erroneous advice from a bank employee, that she had 60 business days to complete a rollover. This advice was bad because the 60-day period is counted by calendar days, not business days.  After she realized her mistake, she asked the IRS for a private letter ruling extending the initial 60-day rollover window. Her request was granted. 

Even though the IRS granted the IRA owner’s request, the whole situation could have easily been avoided. She could have saved herself the time and money of having to ask for a PLR.  She was fortunate to have the IRS rule in her favor. You may not be so lucky if you make similar missteps when you move your IRA funds. What can you learn from the mistakes this IRA owner made?  What should you do if you are moving your IRA funds?

Lesson #1- Consider a transfer instead of a rollover. The taxpayer’s first mistake was choosing to do a rollover instead of a direct transfer. In the PLR, she acknowledged that her intent from the beginning was to move the funds to another IRA. A transfer is a safer way to do this. In a transfer, the IRA funds move directly between IRA custodians. A rollover requires a distribution to you, which you then have to deposit into another IRA within 60 days. Rollovers are more complicated transactions and have many more avenues that can lead to missteps. Transfers eliminate a lot of the potential for error and are subject to far fewer rules and restrictions. In this PLR, the IRA owner did not follow the rule requiring the rollover to be accomplished within 60 calendar days. There is no such rule that applies to transfers. The IRS actively encourages IRA owners to transfer rather than roll over.

Lesson #2 - Give yourself plenty of time. The second mistake was waiting until the last minute to complete the rollover. In the PLR, the IRA owner says that she was at the bank several times during the 60-day period. Why not take care of the rollover sooner? Because she waited until the very end of the 60-day period, her misunderstanding of the how the days were counted made a difference. Life is unpredictable and mistakes happen. It is always a good idea when it comes to IRAs and other financial matters to give yourself plenty of time to get things done.

Lesson #3 - Get good advice from a competent financial advisor (like ones that trains with us). The third mistake was relying on the bank employee for tax advice. While many IRA custodians will provide information to IRA owners, this information cannot replace advice from a trusted advisor. In this situation, the bank employee was willing to help the customer fix the problem caused by her bad advice. In the PLR, we learn that the bank sent a letter admitting the mistake, which probably was helpful in getting a favorable ruling. You may not be as fortunate, so get your advice from someone you know you can trust.

In the end, this IRA owner was lucky. She got to move her IRA funds despite her mistakes. Don’t count on luck when you are moving your IRA funds. These are easy mistakes to avoid. If you want to move your IRA funds, go with a transfer, not a rollover, give yourself plenty of time, and if you are unsure of a rule, speak with a competent advisor.

 

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