Be Careful About How Often You “Roll Over” Your IRA

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Planning Attorney

A long-standing rule about how many IRA-to-IRA “rollovers” a taxpayer can make in a single year has changed, generally speaking. Read this post to avoid unnecessary taxes and penalties.

A rollover means moving funds from one IRA to another. The longstanding rule has been that taxpayers may roll over multiple IRAs in a single year. The Internal Revenue Service had interpreted the limitation of one rollover a year to apply separately to each IRA a taxpayer may own. So the taxpayer could roll over IRA A in February, IRA B in May and IRA C in October without the rollover being treated (and taxed) as an IRA distribution. That rule is what has changed. The U.S. Tax Court ruled that a taxpayer may roll over only a single IRA each year that the year is not a calendar year, but any 365-day period. So if the taxpayer rolls over IRA A on February 1st, she cannot roll over IRA B until February 1st of the following year.

To fully understand what’s involved, you need to know the difference between an IRA “rollover” and “trustee-to-trustee” transfers of IRAs. A rollover occurs when the taxpayer withdraws funds from her IRA and deposits them into a new or different IRA within 60 days of the withdrawal. Clear enough.

But note this: A taxpayer may, however, move as many IRAs as he or she chooses by having them transferred from institution (or “trustee”) to institution. In other words, rather than withdrawing the funds and depositing them into a new IRA within 60 days, the taxpayer directs Charles Schwab to move the IRA funds to a new IRA account at Fidelity. She can do this as often as she would like.

It would seem that this new limitation is no big deal. However, taxpayers often withdraw funds from retirement accounts – perhaps because they need cash for a short time — not knowing the consequences. They can be protected from having to pay taxes on the withdrawals if they deposit the funds in a new account or back into the same account within 60 days. Now, however, if they withdraw funds from more than one account, they will have to choose which one to protect — presumably the largest.

The trap for the unwary, of course, is that many taxpayers know the old rule permitting multiple rollovers every year and are unaware that this rule has changed.

To discuss your NJ estate planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.Please ask us about our video conferencing consultations if you are unable to come to our office.