WSJ story on IRA rollovers

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
communipaw
Posts: 175
Joined: Mon Mar 05, 2007 9:15 am

WSJ story on IRA rollovers

Post by communipaw » Sat May 10, 2014 8:38 pm

pdated May 9, 2014 6:19 p.m. ET
http://online.wsj.com/news/articles/SB1 ... reno64-wsj

A veteran tax lawyer argued his own case in U.S. Tax Court about an individual-retirement-account maneuver that long had been blessed by the Internal Revenue Service. He lost, and now all IRA owners face dangers they didn't before.

HIinvestor
Posts: 1269
Joined: Tue Apr 08, 2014 3:23 am

Re: WSJ story on IRA rollovers

Post by HIinvestor » Sat May 10, 2014 8:50 pm

This is mainly a concern for folks who have funds distributed to themselves BEFORE rolling them over and don't affect folks who simply have funds go straight from one custodian to the next, according to the article. Seems like the couple in the suit were enjoying the use of $65,000 for months between rollovers, which irked the IRS and court. :oops:

bsteiner
Posts: 2934
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: WSJ story on IRA rollovers

Post by bsteiner » Sat May 10, 2014 9:33 pm

The rule isn't new. It's in Section 408(d)(3). See Alvan L. Bobrow, T.C. Memo. 2014-21 (Jan. 27, 2014): http://ustaxcourt.gov/InOpHistoric/Bobr ... M.WPD.pdf; Bidyat K. Bhattacharyya, T.C. Memo. 2007-19: http://ustaxcourt.gov/InOpHistoric/Bhat ... M.WPD.pdf; Marshall H. Martin, T.C. Memo 1992-331: http://www.legalbitstream.com/scripts/i ... 8dd0/2/doc, aff’d., 987 F.2d 770 (5th Cir. 1993).

I was quoted on this in an article by Janet Novack in Forbes on March 25, 2014: http://www.forbes.com/sites/janetnovack ... s-allowed/.

ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: WSJ story on IRA rollovers

Post by ASUGrad » Sat May 10, 2014 9:33 pm

Some people have been using IRA withdrawals as long term loans. Take money from IRA 1, within 60 days take money from IRA 2 and put it back in IRA 1, within 60 days take money from IRA 3 to put it back in IRA 2, IRA 4 to 3, etc.

The rule change was to prevent the above. So now it is 1 indirect RO per year per person, not per IRA. Note it only applies to indirect rollovers, when you have possession and spending power with the money. It doesn't apply to direct rollovers where the money goes straight from the current financial institution to the new one.

Side note: If the check is sent to you and you physically have possession it is still not a problem as long as the check is made payable to the new financial institution and not to you directly. Technically you have the check, but you don't have the ability to spend it. So if a check from Fidelity is sent to you but its made payable to "Vanguard FBO(for benefit of) John Smith" then no worries. I say this because some firms, specifically Fidelity are known for sending rollover checks to clients.

User avatar
baw703916
Posts: 6644
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: WSJ story on IRA rollovers

Post by baw703916 » Sat May 10, 2014 10:02 pm

For most purposes I'm not sure why you would want to not just do a custodian to custodian transfer (unless you were trying to have free use of the money).

But would transfers from IRAs into the TSP would run into problems with this rule? I know the procedures are kind of unique, but I'm not sure if they qualify as a custodian to custodian transfer or a rollover. Does anybody know?
Most of my posts assume no behavioral errors.

Alan S.
Posts: 6948
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: WSJ story on IRA rollovers

Post by Alan S. » Sat May 10, 2014 10:32 pm

baw703916 wrote:For most purposes I'm not sure why you would want to not just do a custodian to custodian transfer (unless you were trying to have free use of the money).

But would transfers from IRAs into the TSP would run into problems with this rule? I know the procedures are kind of unique, but I'm not sure if they qualify as a custodian to custodian transfer or a rollover. Does anybody know?


The one rollover rule, whether interpreted using the former interpretation OR the new interpretation by the IRS, does not apply to rollovers between IRAs and non IRA accounts or vice versa. It only applies when IRA accounts are both the distributing AND the receiving account.

An IRA to TSP rollover is typically done by direct rollover, but can also be done by indirect rollover, although qualified plans may not be comfortable with the source of the rollover funds if done indirectly.

In the larger scheme of things, noted IRA expert Natalie Choate made this comment in a recent article regarding the new IRA position:

The once-per-year rule is a trap for the unwary. For one thing, it's not always clear what a "distribution" is--if you request a cashout of your IRA and the IRA provider sends you two separate checks a month apart, is that one distribution or two? Also, consider "Granny" who has her IRA in six-month CDs. Most banks treat each CD as a separate new IRA, which they then close and distribute when the CD matures. If Granny has multiple CDs in IRAs that close out within 12 months of each other, she won't be able to roll over any but the first one.


As noted by the example in the prior quote, if anyone forfeits tax deferral on a large portion of their retirement savings due to this position, including seniors and younger taxpayers who would also tack on a 10% penalty, the consequences are far more severe than violating other IRS rules. Therefore, some serious problems lie ahead, and we have not heard the end of this one.

HIinvestor
Posts: 1269
Joined: Tue Apr 08, 2014 3:23 am

Re: WSJ story on IRA rollovers

Post by HIinvestor » Sun May 11, 2014 1:09 am

With the Thrift Savings Plan (TSP), the will only direct deposit to the beneficiary, so you cannot get a check written to a custodian unless you are doing a full rollover (not a partial). Will have to talk with Schwab to see if they would recognize an excess distribution by TSP as a rollover I can re-deposit into a tIRA later this year, or perhaps take it to our local bank and see whether they will accept it as a tIRA.

jimkinny
Posts: 1271
Joined: Sun Mar 14, 2010 1:51 pm

Re: WSJ story on IRA rollovers

Post by jimkinny » Sun May 11, 2014 7:30 am

Alan S.
Thanks for the warning re multiple CDs and how banks have dealt with maturing CDs in the past.

I thought I was being clever by splitting my IRA rollover to a new custodial bank several years ago into several CDs, all maturing at the same time. I did this in case I wanted to do an early withdrawal. I was considering letting them all mature, then using a savings account with the same custodian and then doing a custodian to custodian transfer back to Vanguard, all depending on future interests rates.

I think you posted on this change in the interpretation of the IRS rule several months ago and that is why I had worked out the strategy above.

I will clarify with the bank how they handle maturing CDs. I was assuming that I held multiple CDs within one IRA account but it seems I was likely wrong based upon the Natalie Choate quote. Regardless, I will just do a transfer and not do a rollover.

thanks

JIm

ResearchMed
Posts: 5496
Joined: Fri Dec 26, 2008 11:25 pm

Re: WSJ story on IRA rollovers

Post by ResearchMed » Sun May 11, 2014 7:46 am

jimkinny wrote:Alan S.
Thanks for the warning re multiple CDs and how banks have dealt with maturing CDs in the past.

I thought I was being clever by splitting my IRA rollover to a new custodial bank several years ago into several CDs, all maturing at the same time. I did this in case I wanted to do an early withdrawal. I was considering letting them all mature, then using a savings account with the same custodian and then doing a custodian to custodian transfer back to Vanguard, all depending on future interests rates.

I think you posted on this change in the interpretation of the IRS rule several months ago and that is why I had worked out the strategy above.

I will clarify with the bank how they handle maturing CDs. I was assuming that I held multiple CDs within one IRA account but it seems I was likely wrong based upon the Natalie Choate quote. Regardless, I will just do a transfer and not do a rollover.

thanks

JIm


There is a lot of confusion about this, including confusion and misunderstanding about the term "rollover".

As long as you are not taking "custody" of the money, it doesn't matter how many IRA accounts are involved, or whether assets are transferred DIRECTLY from one IRA to another, at the same or different financial institutions. Movement of assets from "custodian to custodian" (within an IRA at one financial institution to a different IRA at the same or different institution) is not affected by the new rules.

So if the maturing CD's within an IRA are simply used to purchase another CD within the IRA, that's not a problem.
And it isn't a problem if the cash is transferred to another IRA to purchase a new CD, as long as the *person* doesn't take the money out and then redeposit it.
Direct transfer of the IRA assets from one IRA to another is not limited.
It doesn't matter how many IRA's are involved. (Well, it might matter to you and to the financial institution, in terms of paperwork and fees.)

Likewise, distributions that are intended to be *kept* (not reinvested in another IRA) are not limited.

It is ONLY the "temporary use of IRA monies between withdrawing and redepositing" from one IRA to another that is the problem
The 60-day limit to redeposit any such money removed from one IRA into another is still allowed, but now it is once per year per PERSON, rather than once per year per IRA account (of which people can have several or many).

RM

placeholder
Posts: 3954
Joined: Tue Aug 06, 2013 12:43 pm

Re: WSJ story on IRA rollovers

Post by placeholder » Sun May 11, 2014 11:35 am


User avatar
baw703916
Posts: 6644
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: WSJ story on IRA rollovers

Post by baw703916 » Sun May 11, 2014 12:18 pm

HIinvestor wrote:With the Thrift Savings Plan (TSP), the will only direct deposit to the beneficiary, so you cannot get a check written to a custodian unless you are doing a full rollover (not a partial). Will have to talk with Schwab to see if they would recognize an excess distribution by TSP as a rollover I can re-deposit into a tIRA later this year, or perhaps take it to our local bank and see whether they will accept it as a tIRA.


As I understand it, the issue only comes up when money is transferred from one IRA to another IRA as a rollover (as opposed to a direct transfer). Since the TSP isn't considered an IRA there should be no issue.
Most of my posts assume no behavioral errors.

chaz
Posts: 13601
Joined: Tue Feb 27, 2007 2:44 pm

Re: WSJ story on IRA rollovers

Post by chaz » Sun May 11, 2014 12:29 pm

bsteiner wrote:The rule isn't new. It's in Section 408(d)(3). See Alvan L. Bobrow, T.C. Memo. 2014-21 (Jan. 27, 2014): http://ustaxcourt.gov/InOpHistoric/Bobr ... M.WPD.pdf; Bidyat K. Bhattacharyya, T.C. Memo. 2007-19: http://ustaxcourt.gov/InOpHistoric/Bhat ... M.WPD.pdf; Marshall H. Martin, T.C. Memo 1992-331: http://www.legalbitstream.com/scripts/i ... 8dd0/2/doc, aff’d., 987 F.2d 770 (5th Cir. 1993).

I was quoted on this in an article by Janet Novack in Forbes on March 25, 2014: http://www.forbes.com/sites/janetnovack ... s-allowed/.

Bruce, glad you are a BH posting. Your posts are always a pleasure to read and right on the money.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

Post Reply