IRA Rollovers

IRA ROLLOVERS

Some time ago, the powers that be decided it would be best to encourage us to save for our retirement. For individuals, this encouragement can in the form of the individual retirement account. The benefits of the IRA were so well publicized that the vast majority of workers have established these accounts and the letters "IRA" have become part of the American lore. Unfortunately, those in charge haven't done as good a job with the ABCs of moving your IRA from one investment to another. A recent case shows just how costly it can be if you fail to follow the particulars to the letter.

In the actual case, Mr. Martin had an IRA at one brokerage company and wanted to move it to another. Mr. Martin knew that the tax rules specifically permitted such a maneuver. It's called an IRA rollover. The rollover rules allow you to withdraw monies from an IRA account and transfer them to another IRA without any tax. Mr. Martin also knew that in order to qualify as a rollover, the deposit to the new brokerage account had to be made within 60 days after he received the monies from the old IRA. What Mr. Martin didn't know was that an IRA to IRA rollover is permitted only once per year.

Mr. Martin's saga began on February 5, 1987 when he requested a check for the $110,000 balance in his IRA account. He received a check in his own name and that same day deposited all of the money in an new IRA with a different broker. Everything was fine so far because Mr. Martin clearly made the rollover within 60 days of the withdraw from the old IRA. His problems can later that year.

In May of that same year, Mr. Martin's new broker had done a fabulous job and his IRA account had grown to $165,000. At that point, Mr. Martin withdrew his IRA funds thinking that he had 60 days to make another rollover. In fact, 59 days later, Mr. Martin redeposited the money in his IRA. The problem was that he had already made a rollover in February --- less than a year ago. As such, when he made the withdraw in May, he was making a fully taxable withdrawal from his IRA. This is exactly what the court ruled in upholding the IRS's request for additional tax and more than $26,000 in interest and penalties.

To rub salt in the wound even further, Mr. Martin later discovered that he could have easily avoided the whole mess. You see the rule which prohibits more than one tax-free rollover per year applies to distributions that are made directly to the account owner and then re-deposited by him in an IRA. It doesn't apply to so-called direct "trustee to trustee" transfers. An unlimited number of these direct transfers are allowed. Such transfers must be made directly between the trustee of one IRA and the trustee of another IRA. You cannot be the middleman. Therefore, had Mr. Martin requested that the February 5 check be made payable to the new IRA trustee rather than himself, the February 5 withdraw would have been a "trustee to trustee" transfer and he wouldn't have run afoul one rollover per year rule when he later withdrew his IRA funds in May.

To articles about Mandatory IRA withdrawals | IRA withdrawals by Beneficiaries

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