New Rules to Know Before Moving Your IRA
By Sarah Brenner, IRA Technical Expert
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Many IRA owners are savvy investors who are always looking for ways to maximize the investment return on their IRAs. It is not unusual for IRA owners to shop around and look for IRA investments that offer better earnings, whether it be a certificate of deposit with a higher interest rate or a mutual fund with a better return. If you are an IRA owner looking for the best investment option, there are new rules in 2015 that you will want to know before moving your IRA. If you make an error in your effort to maximize the return on your IRA, you may end up with your entire IRA being distributed and taxable to you.
Beginning in 2015, more restrictive rollover rules limit you to just one 60-day rollover each year. This is true regardless of how many IRAs you have and is even true if you have a Traditional IRA and Roth IRA. For this rule, once per year does not mean once per calendar year, but instead, 365 days from the date you receive the first distribution from one of your IRAs that is rolled over to the same type of IRA (i.e. traditional IRA to traditional IRA rollover). There are exceptions for conversions and rollovers from company plans. The new rules are the result of a more restrictive position on rollovers that the IRS is taking after a 2014 Tax Court case, the Bobrow case. How do the new rules affect IRA owners considering moving their IRAs to get the best return on their IRA investment? Consider the following example.
Bob, age 73, has an IRA at Hometown Bank. He also has another IRA at Othertown Bank. Both of his IRAs are invested in certificates of deposit (CDs). Bob is not happy with the interest rates on the CDs in either IRA. He has lunch at the local diner with his friend, Gene. Gene tells Bob that Community Bank is offering a special promotion with some great rates on CDs. Bob decides he want to move his IRA to Community Bank to take advantage of the higher rates. He contacts Hometown Bank and Othertown Bank and requests distributions from both IRAs. His plan is to roll over the funds from both IRAs within 60 days to a new IRA with Community Bank and get a better interest rate on his IRA investment. By taking these distributions, Bob has just made a serious error. Only one of his IRA distributions is eligible for rollover under the new stricter 2015 rollover rules. Remember, an IRA owner is limited to one rollover per year. The second IRA distribution would be taxable to Bob and not eligible for rollover to an IRA.
So how can an IRA owner move IRA funds to another custodian to take advantage of a better investment avoid Bob’s mistake? The solution for IRA owners is to do a trustee-to-trustee transfer when moving IRA funds instead of attempting a 60-day rollover. There are no limits on the number of transfers between IRAs that an IRA owner can do in a year. Instead of requesting a distribution be paid to him from each of his IRAs, Bob should have contacted Community Bank and asked for transfer paperwork to be completed and sent to both Hometown and Othertown Bank. The funds would then be moved directly to a new IRA with Community Bank. Sometimes transferring may seem more difficult for an IRA owner than just requesting a distribution from an IRA. There might be more paperwork, a fee or even more time involved to process the transaction. However, by doing a transfer, an IRA owner like Bob avoids running afoul of the more restrictive rollover rules when seeking a higher rate of return on his IRA investment.
The rules for rollovers and transfers can be complicated. When moving your IRA for a better investment, you will want to do everything possible to protect it. Know the rules, consider a transfer instead of a rollover, and always consult with a knowledgeable advisor before making your move.
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