Don't Get Caught by IRA Rollover Rules
IRA owners are limited to one 60-day rollover from one IRA to another in a 12-month period — and this means across all your IRA accounts. This rule went into effect on Jan. 1, 2015, but you may just be discovering this if you've tried to do more than one rollover this year.
With the once-per-year transfer, a check is cut directly to the account owner with the understanding that the funds must be back in an IRA within 60 days or the funds will become subject to taxes and penalties. Before this decision, one transfer could be done in a 12-month period for each IRA owned.
Some people used this — not commonly, but occasionally — as a form of personal loan. You could "borrow" the money from your IRA without tax consequences by sequencing together a bunch of 60-day rollovers and actually get a pretty long use of money, explain tax experts.
The couple — the Bobrows — who took a rollover case to tax court ended up ruining this sweet loophole for everyone. Now, all IRA owners are limited to doing just one 60-day transfer annually, no matter how many IRAs they happen to own.
The once-a-year rule is not based on a calendar year, but a fiscal year — 12 months or 365 days. That means if you did a rollover today, you can't do another until the same day next year — so, if you took the money out on July 23, 2016, your next rollover couldn't be done until July 23, 2017.
The rule doesn't apply to a trustee-to-trustee transfer — a transfer between brokerages. If a check is involved, it will be made payable to the brokerage or bank, for the benefit of your account, but you won't access the funds. You can do those all day long — you can do 15 a day if you wanted to.
There is no limit for rollovers from traditional to Roth IRAs ("conversions") either, although those may be governed by other rules.
But that's not all
There are also some new rules regarding the status of inherited IRAs with regard to creditors, which were clarified through a Supreme Court decision.
Generally, owners of workplace retirement plans enjoy federal protections from creditors and states determine whether a person's IRA is creditor-protected. But what if you bequeath your IRA to your child? Should inherited IRAs be counted as retirement plans or piles of money? The court decided that inherited IRAs are more like standard accounts, not retirement accounts.
The only exception is the spousal rollover. When spouses inherit an IRA, they can take the account and use it as their own retirement account. A spousal rollover could be challenged by creditors, but the law seems to favor widows and widowers.
And what can other heirs do? A parent can leave an IRA to a trust or take the money out of an IRA and buy life insurance. This way, the children end up with tax-free money with no distribution rules attached. And — the money would be creditor-protected.
These are just the basics; inheritance and rollover situations can get complex. Speak with a qualified professional to help you.