Should You Avoid Direct IRA Rollovers?
25 March 2014
Once a year, you can roll over a distribution from your IRA—that is, withdraw money from your IRA and re-deposit it into another IRA, without tax implications. As a consequence of a recent Tax Court ruling though, it’s no longer clear if the one-year rule applies to all IRAs you might own, or each one separately.
In January, the court ruled against a taxpayer who had rolled over funds from multiple IRAs, holding that regardless of how many IRAs a taxpayer has, he or she may make only one nontaxable rollover within each 12-month period.
“The guidelines for rollovers have been blurred by the Tax Court’s decision, which can be confusing,” says Eric Rigby, principal and financial expert at Rigby Financial Group. “What’s still clear though, is that you should avoid the risks involved with doing an IRA direct rollover and instead always do a trustee-to-trustee transfer instead.”
What Does This Mean for You?
Unfortunately the Tax Court ruling is unclear, so for now, taxpayers who rely on the proposed regulations to make multiple tax-free IRA rollovers within a 12-month period do so at their own risk.
A related risk—and one we tell our clients to never take—is doing an IRA or qualified retirement plan direct rollover themselves. Until you’re 59½, we advise you to never take a direct distribution from an IRA in the form of a check made out to you. Ever. In fact, our opinion is that the only way you should move IRA funds is through a trustee-to-trustee transfer, in which you ask your financial institution to transfer your IRA or other qualified plan directly into an IRA at another financial institution.
Here’s why. People sometimes withdraw money from their IRAs to fund a large purchase, such as a house. They have every intention of putting the money back within 60 days. But invariably they don’t, and the full amount becomes taxable income. And they owe early withdrawal penalties as well as income tax on the full amount. Don’t risk it. There are only downsides to direct IRA rollovers. No upsides.
Please note that you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees aren’t subject to the one-rollover-per-year rule.
Update Your Beneficiaries!
In addition to never taking a direct rollover from your IRA, we also strongly suggest that you review the beneficiaries of your IRA and qualified plan any time you have a “change of life” event, such as a new job, divorce, remarriage or birth of a child. At the very least, review your beneficiaries once a year. This goes for your life insurance policy(ies) as well.
Why is this so important? Because according to the law, the beneficiaries on your IRA or qualified retirement plan will always determine where your money goes, not your will. Remember that when you reach retirement age, your IRA could be worth several hundred thousand dollars—perhaps even several million. For many people over 65, their retirement plan generally represents at least 50% of their net worth. Make sure your hard-earned money goes where you want it to go.
Rigby Financial Group offers extensive services in the areas of personal financial planning. Please contact us for advice regarding any changes you are thinking about making to your retirement plan(s).
The information presented here is not specific to any individual’s personal circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.