Have you considered, or have, taken an IRA 60-Day Rollover? If case you are not familiar, this is a process that allows an individual to take money out of their individual retirement account, without taxes or penalty, as long as the money is replaced back into a tax-deferred account within a 60-day period. However, if you have, or are considering doing this, take note!

Ed Slott, a leading IRA expert, recently wrote an article for Investment News reviewing the recent Supreme Court Case of IRS vs. Bobrow. The case now codifies more stringent rules and penalties related to incorrect or incomplete rollovers (per IRC Section 408(d)(3)(B)). With April 15th coming soon, please read the following summary of the new rules and call us or your CPA if you have any concerns:

1. Past IRS Private Letter Rulings typically allowed any of us to roll over multiple accounts one time per year (one for each IRA if you had more than one IRA.) The IRS/Supreme court has now ruled that you only do this once per year in TOTAL (not per account).

For example: Assume you have three IRAs accounts and you needing money. Previously you could have taken it from any of them via a rollover. Now you will need to determine FIRST which account you will take the money from (perhaps the one that is the worst performer) knowing that if you DO NOT put the money back in 60 days, that you will owe taxes and possibly penalties on the distribution.

As an example, if you are 50 years old and take out $10,000 as a rollover from IRA #1 on April 1, 2014 and if you are in the 28% tax bracket, you will find out that you owe an additional $3,800 in taxes come April 15, 2015 (that is a 38% tax rate in this example). This amount tax/penalty includes $2,800 in taxes (28% x $10,000) + $1,000 in penalties (10% on $10,000 since you are too young…this will penalty not apply if you are older than 59 ½ years old). HOWEVER, this tax will be avoided if you put $10,000 back into IRA #1 before the end of 60 days. And don’t be late, the IRS does NOT like to hear excuses! The big change is illustrated in this case as the taxpayer (Bobrow) tried to “keep it rolling” by trying to Rollover $10,000 from IRA #2 inside of the 60 day window to pay pack the money distributed from IRA #1…the IRS said “you can’t do that”.

2. Before this ruling, most tax advisors believed that you could do one Rollover per “Calendar Year”. Now it is clear that if you tale a Rollover from IRA #1 on April 1st 2014, you must wait until after April 1, 2015 to do it again. In the past, if you took the rollover, as in #1 above, in December 2014 it was commonly believed that you could do another one on January 1st of 2015. That is no longer the case. If you take a second Rollover before the end of 365 calendar days, you will NOT be able to roll-it back into that IRA and taxes and penalties will be owed.

3. Therefore. if you abuse these rules (such as in the Bobrow case), not only are all excess rollovers subject to income taxes and penalties, but if you use other rollover funds from another account to complete the rollover the IRS may also impose another 6% penalty for “excess contributions” since the funds from IRA #2 were ineligible to be used to put back into IRA #1.

To further our previous example, if you tried to pay back the distribution in #1 above with a a second $10,000 Rollover from IRA #2, the IRS could assess taxes and penalties of $8,200 on the $20,000 distribution. This includes another 6% penalty on the “excess contributions” since you were ineligible to deposit the funds into the IRA #1 in the first place. That is a 41% tax for those in the 28% tax bracket that would only leave you with a balance of $11,800 on the $20,000 you took out…OUCH.

Although it is not stated in the ruling, we would suggest that you take caution and treat all IRAs, 401k’s and other retirement accounts as if they fall under the same restrictions (these rules are complicated).

Also, this ruling does not specifically discuss any changes or limitations related to rollovers from employer plans (such as 401k’s) to self-directed IRAs, Roth IRA Conversions or custodial transfers between IRAs (IRA to IRA), but there are complex rules and ramifications involved in these transactions as well and we suggest that you get tax advice to address these any tax issues that may relate specifically to your situation.

Bottom line, the IRS always takes bad fact patterns (such as this Bobrow case that seems to have done the Rollovers to the extreme), but it appears to be case law…at least for now.


IMPORTANT DISCLOSURES

Financial Planning and Investment Advice offered through Avidian Wealth Management (STA), a registered investment advisor.

STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual 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.

As always, a copy of our current written disclosure statement discussing our services and fees continues to be available for your review upon request.

Additional Articles

Have you considered, or have, taken an IRA 60-Day Rollover? If case you are not…

Disclaimer:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Solutions, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions, LLC. Please remember to contact Avidian Wealth Solutions, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. Avidian Wealth Solutions, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Avidian Wealth Solutions, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Financial Planning and Investment Advice offered through Avidian Wealth Solutions (Avidian), a registered investment advisor. Avidian does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her 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.

LET'S TALK