News

It’s Official: One IRA Rollover Per Year

21 October 2014

The IRS has spoken: Starting January 1, 2015, you can only roll over one individual retirement account (IRA) within a 12-month period, no matter how many IRAs you have. This clarifies a U.S. Tax Court ruling we discussed in March, where the court ruled against a New Jersey couple with multiple IRAs who did numerous rollovers in a short time period. At the time, the somewhat-confusing ruling blurred the guidelines for rollovers.

Previously, the IRS allowed you to roll over each IRA you owned once per year. Now, however, there can be no confusion. One rollover per person per year, not one per IRA.

But as we said in March, the Rigby Financial Group recommends that you never, ever roll over even one IRA. Here’s why.

Make a Mistake, and the Penalties are Huge

It might be tempting to roll over an IRA and use that check for purposes like college tuition or a home purchase. And you might have every intention of depositing the amount into another IRA within the 60-day time limit.

But 60 days means 60 days, not two months. If you’re even one day late, the IRS can come down on you like a hammer. If, say, your IRA was worth $100,000, the IRS could deduct income tax, which at the highest federal tax rate could be 39.6%. If you’re not 59 ½, it then becomes an early distribution, which means another 10% penalty. If you live in a state like New York or California, you could face an additional state income tax of 5%-10%.

And just like that, your $100,000 becomes $40,000.

A Rollover is Different from a Trustee-to-Trustee Transfer

But there’s a simple solution. Don’t ever rollover your funds—that is, don’t ever take a direct distribution from an IRA in the form of a check made out to you. Ever. The only way you should move IRA funds is through a trustee-to-trustee transfer, where your financial institution transfers your IRA or other qualified plan directly into an IRA at another financial institution. If you never touch the money, you can’t get into trouble.

Remember: Your IRA is for your retirement. Yes, there are several penalty-free exceptions to distributions taken before age 59½, but the IRS tends to frown on using an IRA for a pre-retirement, tax-free cash flow.

Whatever route you want to take, call Rigby Financial Group, and we’ll walk you through the process. Tax law is intricate and often mind-boggling, even for the simplest of questions. If you think you’ve made a mistake with your IRA, it’s no time to be embarrassed and take your chances. We’re here to help.

Are Your Beneficiaries Current?

Since we’re talking about IRAs, it’s a good time to remind you about an action you can take any time: Reviewing the beneficiaries of your IRA or qualified plan (and your insurance policies). Don’t wait until you have a “change of life” event, such as a new job, divorce, remarriage or birth of a child.

Remember that if you die, the money from your IRA or qualified plan will go to the beneficiaries listed on the account—no matter what your will says. We’ve seen a few unfortunate cases of funds going to unintended recipients simply because the owner of the account didn’t update his or her beneficiaries. So put a reminder in your calendar to review your beneficiaries at least once a year. It will be 10 minutes well spent.

Rigby Financial Group offers extensive services in the areas of personal financial planning and tax planning. Please contact us for advice regarding any changes you are thinking about making to your retirement plan(s).

Disclaimer

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.