A change in tax rules that went into effect in 2015 created potential problems for investors who roll money from one IRA into a new IRA. Now, with a new ruling, the IRS is offering relief for some who inadvertently violate the rules.
Prior to 2015, if you owned more than one IRA, you could roll over each one once a year. As long as you completed the rollover within 60 days of the payout, there was no tax. After the 2015 U.S. Tax Court opinion, such IRA rollovers could be very costly. The new rules allow only one rollover in any 12-month period.
You can avoid trouble by using direct IRA-to-IRA transfers. With a transfer, the IRA custodian sends the money directly to the new IRA custodian. There are no tax consequences and you are not required to report anything on your income tax return. An individual is permitted to make as many transfers a year as they would like.
A rollover may appear similar to a transfer but it is a very different operation. With a rollover, if the distributed assets are not contributed back into a qualified retirement account within 60 days, the distribution is considered a withdrawal and becomes taxable. Additionally, if you are under age 59 1⁄2, an extra 10 percent penalty for an early withdrawal may apply.
With the one rollover per year rule, all additional rollovers are treated as distributions, and the full amount is included on your tax return.
Realizing there could be circumstances where meeting the 60-day rollover rule could be difficult, the IRS in Revenue Procedure 2016-47, which went into effect Aug. 24, 2016, will grant a waiver. Taxpayers can self-certify that due to certain circumstances — such as a death or serious illness in the family, an error by the financial institution, severe damage to your residence, incarceration or a postal error — the time limit was not met, and avoid the penalties associated with the 60-day rollover rule.
Understand the rules before you move IRA or 401k funds. Have questions on other financial topics you would like to see addressed in future issues? Visit Lineweaver.net/ask to submit your question.
