Making Cents: Should you rollover or transfer your IRA accounts?
By: John P. Napolitano, CFP®, CPA, PFS, MST, RLP®
There are two ways to move your IRA money. One is known as a rollover and the other is known as a direct transfer. To make it simple, a direct transfer is when one IRA custodian sends the funds directly to another IRA custodian. A rollover is when the IRA custodian sends you a check leaving you 60 days to reinvest that amount with another IRA custodian as an IRA account or become subject to taxation.
Since January 1, 2015, new rules apply which only permit one IRA rollover per year. This can cause problems for those who are unaware in terms of causing that IRA to be taxed and possibly be assessed with interest and an early withdrawal penalty.
This is easily confused with direct transfers as there are no limits on how many direct transfers one may do each year. But it seems as if IRA rollovers were being used too frequently by taxpayers as a 60 day personal loan, so rollovers became limited to once per year.
In general, this rule seems simple enough to understand. But the problem arose when people had more than one IRA account. The IRS was leading taxpayers to believe that this once per year rollover rule (or 60 day personal loan if that is your intent) applied to each IRA account separately. But as a result of a recent tax court case, the IRS now makes it clear that you are only entitled to one IRA rollover per year regardless of how many IRA accounts you may have.
If this is the year where you intended to clean up your personal finances and consolidate your IRA accounts under one roof or with one advisor, make sure that you do not choose the rollover route and that your transfers are properly done as a direct custodian to custodian transfer with you out of the middle.
Bravo for taking the initiative to consolidate and organize your retirement assets. But do not assume that your IRA custodian will do this correctly. This is most problematic for IRA account holders at certain institutions that do not do direct transfers as a rule.
The once per year rule applies to a 365 day period, and not a calendar year. If you were to do a rollover IRA on August 1, your next eligible IRA rollover date would be August 2 of the following year. A good start to avoiding problems would be to take inventory of all of your IRA accounts. Find out from the institution whether they do direct transfers. If yes, you are all set to transfer the account to another custodian or advisor. If your custodian does not do direct transfers, make a note regarding the possible maturity date of your account and be prepared to get the funds to an institution that will allow direct transfers.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.