your ira rollover just got "ran over"

By Justin Bolmgren

Background on your rollover options

 There are two ways to move IRA money to another IRA: Directly and Indirectly. A direct transfer, or a trustee-to-trustee transfer, happens when funds move from one IRA to another without the client touching the money. Sometimes this can occur even when a check is involved.  In that case, the check will be payable to the new IRA, and not you.  These direct transfers can be done as often as you wish. An indirect transfer, which was more common many years ago, you receive a rollover check that is paid directly to the owner (less standard 20% withholding) instead of directly to new IRA custodian.  The owner would have 60 days to rollover funds to either another or the same IRA first depositing the money in a personal account. Long standing interpretation of IRS guidance said that an IRA owner could do an indirect rollover once per year PER ACCOUNT.  For example; if you had three IRAs, you could rollover funds a total of three times. 

New IRS interpretation - a subtle change 

You only get one chance a year now to make an indirect transfer...period.  A second rollover from any IRA made within one year from of the first 60-day rollover could cause a taxable distribution (you pay taxes).  Same example; if you have three IRAs, you can now rollover funds a total of one time.  This new interpretation of the rollover rule constitutes a significant change from the past. In Announcement 2014-15, released shortly after the IRS decision, the IRS said it would not begin to enforce the new interpretation of the rule any earlier than 2015. Further, there is no change to the direct transfer rules.

how significant is the issue 

As mentioned, the 60 day method was THE method for transferring retirement assets... in the past.  But how practical is it today? Do my IRA assets need to be frozen in fear that I unwittingly make a mistake? In fact most banks, financial firms, and employers offer the more convenient (and less risky) direct rollover option.  Not using absolutes, but for nearly all financial firms, this process is done directly using the automated ACAT system. A form is signed and the account is transferred from the old IRA account to new with no checks being drawn.  What about employers? Once again, major employers and retirement plan administrators offer, and even encourage, the simpler direct rollover option. And for other organizations not mentioned where you may hold IRA assets, drafting a check payable to the new IRA custodian classifies as direct rollover and, once again, is often available.  Example language; "TD Ameritrade FBO: Sam Sample IRA".  So who really uses the IN-direct method?  And what is the big deal? 

The big (but rare) deal

Having the IRS deem your IRA rollover as invalid could cost a lot of money. The original IRA distribution would be taxed and possibly penalized if your age is under 59 1/2.  If the assumed rollover is larger than that years contribution max...well, then you get another penalty.  Taxes and two penalties...this may be one of the costliest IRS mistakes someone could make. As mentioned though, the probability of you breaking this rule is slim.  Most rollovers today, as recently discussed, are done Direct.  In the end, this subtle change in IRS guidance will certainly prey on unsuspecting persons.   One who, for example, merely decided to transfer this years maturing CDs from separate local bank IRAs into one Vanguard IRA.  Catastrophy!

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