Happy New Year; 2014 is a year of memories and 2015 is a year of promises. Some of those promises might not be pleasant for individuals transferring an Individual Retirement Account (IRA) unless they follow very specific rules.
IRAs can be transferred to a new advisor or trustee in one of two ways:
- Direct transfer- where the IRA funds move from one trustee to another trustee without the account owner ever receiving the money, and
- Indirect transfer- where the account owner receives funds from the IRA in the form of a check made payable to the account owner. The account owner can then deposit the IRA check into another IRA within 60 days and have no tax obligation for the “rollover.” This 60 day withdrawal has also been used by some IRA owners to temporarily access IRA funds for short term purposes. An account owner has been allowed to access each IRA account he/she owned once in a 12 month period with no tax consequences as long as the 60 day rule was met. This once per year rule was allowed for each IRA account an individual had.
There has been a major change in these IRA rollover rules beginning January 12, 2015. Now, only one IRA (defined as traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs) can be transferred or accessed in the preceding twelve months regardless of the number of IRAs the individual has. A tax court case in early 2014 changed the interpretation of once per year per account to once per year per individual.
The result of this change is that any subsequent transfer or access to another IRA within the same 12 month period will be considered a taxable distribution—subject to income tax and 10% pre-mature distribution tax if applicable (i.e. the individual is under age 59 ½). There are no provisions for remediation of an erroneous second transfer in the same 12 months—the second transfer is taxable.
Consider the following example. An account owner accesses his/her account for a small distribution in March. In January of the following year, the account owner decides to transfer the same (or a different) IRA to another trustee. If the account owner receives the funds for the transfer, the second distribution is a taxable distribution. A significant tax burden may be incurred inadvertently.
Given the complexities involved, some clarifications are warranted. This rule does not apply to rollovers from an employer sponsored plan (401(k), 403(b), etc.) into a self-directed IRA. Rollovers from an IRA back into an employer plan are also exempt. Roth conversions (rolling funds from a traditional IRA to a Roth IRA) are excluded from the rule.
In summary, individuals transferring IRA accounts to another trustee should always use a direct transfer (where funds are transferred directly from the old trustee to the new trustee or the check is made payable to the new trustee if it comes to the IRA owner). Short term, 60 day access to IRA funds should be done with great care—only once in any 12 month (not calendar year) period regardless of the number of IRA accounts owned.
We at Paragon Financial Advisors will assist our clients as they prepare for accessing their IRA accounts. Which accounts should be accessed first and asset allocation within accounts for investment purposes can have significant long term implications on your retirement planning. Consult your tax professional if you are contemplating indirectly transferring your IRA in this new year of “promise.” Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.