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How to Avoid Costly IRA Moves

How to Avoid Costly IRA Moves

August 26, 2016

For a variety of reasons, it is very common for people to move money from one IRA to another. There are two different ways this can happen…either directly or indirectly.

One way is for the company holding the existing IRA to send the funds directly to the company where the new IRA has been established. This is known as a direct rollover or transfer. In a nutshell, the investor never “touches” the money and as a consequence there are no worries regarding taxes or penalties.

The other way is for the company holding the existing IRA to send a check payable to the investor and then he or she writes a check to the company with the newly established IRA. Since the investor receives the funds, deposits it, and then writes a check, they have “touched” the money and this is known as an indirect rollover.

In the situations of indirect rollovers, money leaving the old IRA must make it into the new IRA within 60 days to avoid taxes and possible penalties, which brings us to the heart of this article.

For many years, the IRS believed an individual could make one indirect rollover per IRA every 365 days. That is no longer the case. In a 2014 landmark tax-court decision, a much stricter interpretation of the indirect rollover rule now applies.

As of January 2015, only one indirect rollover is allowed every 365 days regardless of how many IRA’s a person owns. This includes Traditional and Roth IRA’s, Simple IRA’s, and SEP’s. If someone violates this rule, the first indirect rollover is allowed and any other indirect rollovers are subject to taxes, possible penalties, and maybe even excise taxes.

It sounds complicated but the solution is actually simple. Whenever possible, if you’re moving an IRA do a direct rollover or transfer and try to avoid indirect rollovers.

As always, if you're ever unsure give us a call and one of our professionals will be happy to discuss it with you.