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The New Rules Of The IRA Rollover: How To Protect Your Money From The Taxman’s Penalties

by Amanda Han on May 22, 2014 · 9 comments

  
New IRA Rollover Rules

Why keep your money in the stock market with assets that you have no control over?

If you can think of a good reason to do that then please, let me know. My philosophy has always been that diversification may not always be a good thing.

For example, if you know your local real estate market like the back of your hand, then you can probably generate better returns investing in that than you could by blindly putting funds in a diversified stock portfolio comprised of large cap and small cap stocks.

Related: Real Estate is Better than Stocks – Fact, Not Opinion.

Diversification is Not Always Good

This is one of the biggest reasons that a large percentage of our clients have chosen to move their money from the traditional retirement accounts from large financial institutions and brokerage houses over to the self-directed arena.

With a self-directed account, you have more options when it comes to retirement investing. Rather than being tied into a portfolio of stocks and mutual funds, you have much more control over what you can invest in. As you may have guessed, some of the most popular investments are real estate related such as rentals and notes.

Watch Your Step Before Rolling Over IRAs

Before money can be moved over to a self-directed account, you need to make sure that you don’t make a mistake in the money transfer process.

A simple mistake when rolling IRA money between retirement accounts can be very costly which can include subjecting that money to both taxes and early distribution penalties.  If done correctly, the 60-Day IRA rollover rule says that you can have the custodian write you a check to take the money out of the old  IRA, and as long as you deposit the money into the new IRA within the 60 day period, you will not have any taxes or penalties.  This is considered a tax-free rollover.

Related: What to Watch out For in Self Directed IRA Transactions

New IRA Rollover Rules

The Tax Court recently came out with some new rules which potentially limit how we move our IRA money around.

If you are a real estate investor and you are moving money between IRA accounts or between custodians, here are some important things to take note of as part of the new IRA roll over rules:

1. The 60-Day rollover rule applies to all IRAs. Prior to this court ruling, a lot of IRA custodians and financial advisors took the position that you can have a 60-Day rollover for each IRA you have. So if you had three different IRAs, advisors were under the impression that you can use the 60-Day IRA rollover three times, one for each IRA. The new rules under the recent Tax Court clarify that starting in 2015, this one time per year rollover will be allowed once, regardless of how many IRAs you have. So even if you have three different IRAs, you can only have one 60-Day rollover.

2. The 1-Year period is not based on a tax year, rather it is based on a one-year period (June through June for example). For example, if an investor made a 60-Day rollover on May 1, 2014, they cannot use the 60-Day rollover strategy again until May 1, 2015. This can create issues for some investors who may have multiple IRA accounts that they are trying to consolidate into one IRA to be used for self-directed investing.  The good news is that there is a way around that. You can completely avoid the 60-Day rollover rules and the one-year period with trustee to trustee transfers.

Ways Around The New Rollover Rules

Let’s say you have 4 different IRAs and you want to move all of them into a new self-directed IRA that you set up to invest in notes. If you have the custodians write you the checks to be deposited into the new self-directed account, you may be in hot waters with the IRS as a result of the new rules.

What you can do to avoid the 60-Day rollover rules is to simply have the new custodian request the funds directly from your current custodians.

The first step is to identify a self-directed custodian that you like and then open an account with them.

Once the account is open, the new custodian can provide you with paperwork which authorizes them to request that the money be transferred directly from the old custodians.

This way, the money never touches your hands and you are able to avoid the new rollover rules that the Tax Courts have now put in place. With trustee to trustee transfers, there is no limit to how many times this can happened each year.

So if a few months down the road you determined that you wanted to change custodians, you can do another trustee to trustee transfer.

Another benefit of doing trustee to trustee rollovers is that it minimizes the possibility of mistakes being made. Moving retirement money can be a complex task, and filling out the transfer paperwork alone can be a daunting task.

Whenever in doubt, be sure to request the assistance of your tax advisor to make sure that you are doing things correctly to avoid mistakes that may cost you down the road.

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{ 9 comments… read them below or add one }

Loren Whitney May 22, 2014 at 2:54 pm

I think this is great timing on this article and topic. I was actually going to write a similar blog myself via BP but I’ll defer since you’ve hit the nail on the head. Nice work!

The one thing I would like to clarify that that rollovers and transfers are reported very differently. I’ve never heard of anyone using the jargon, “trustee to trustee rollovers” in the self-directed industry. That would always be classified as a trustee-to-trustee transfer, not to be confused with a rollover.

Also, as I understand it, the new rollover rule also doesn’t apply to holders with multiple 401k plans. You may rollover a number of 401K plans into a single IRA without having to worry about the new ruling. Anyone disagree?

Thanks again for bringing this topic up Amanda.

Reply

Mark Adams May 22, 2014 at 3:36 pm

Yes, I agree about the transfer vs. rollover status. However, there is a third variation too – a direct rollover which is sort of a mix between the two. This is a reportable, but non taxable event and there is no 60 day window. It is when a transfer is made directly to the new plan or self directed IRA custodian, never to the individual.

Reply

Loren Whitney May 22, 2014 at 4:37 pm

Good mention Mark. I believe the IRS reporting for a direct rollover is exactly the same as a rollover however so the new rule still applies. The ‘direct’ is really a descriptive phrase more than anything else.

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Sharon Tzib May 23, 2014 at 9:19 am

I think you just saved a lot of people a lot of heart ache. Good info, Amanda!

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Amanda Han May 23, 2014 at 10:28 am

Thanks Sharon. I hate it when people find out too late after making a mistake.

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Brett Synicky May 23, 2014 at 7:04 pm

Amanda,

There are many cost/time advantages (writing your own checks and custodian fees) to utilizing checkbook control instead of a custodian. Could you still avoid the potential violation without using a custodian to manage your sdira?

Great topic btw!

Thanks!

Reply

Mark Adams May 23, 2014 at 7:11 pm

Hi, good question and Amanda will no doubt have more to add, but I was just checking my email and wanted to add that even self directed IRAs need a custodian to make them IRAs.
Its just getting a custodian that permits self direction. You would actually create a LLC that you control and the custodian invests in it, and you then control that LLC. So there’s no way to totally avoid a custodian, but instead of a traditional one investing in there own stock offerings and funds, a self directed IRA custodian invests in your LLC and you take it from there.

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Dmitriy Fomichenko May 25, 2014 at 12:16 am

Mark, I agree with you that there is no way to avoid the custodian with an IRA, even checkbook control options is utilized (IRA owned LLC). However, there is a way to eliminate the custodian and have full control over your retirement account by utilizing truly self-directed Solo 401k. While this plan being offered by custodian, IRS does not require you to use one and you can control your retirement assets by serving as a trustee of your own plan.
Great tread, thank you Amanda for writing and everyone for participating, good education!

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Sara Cunningham May 25, 2014 at 11:43 am

Good timing for me. I am actually about to a rollover on a 401k and an IRA. Didn’t know about these rules.

Thank you for posting.

Sara

Reply

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