Rollovers are a popular way of moving IRA money from one investment option to another. They are also a way to get a short-term tax-free loan from your IRA. An IRA withdrawal is reported on your tax return but is treated as a tax-free transaction if:
- You redeposit the amount you withdrew from the IRA into the same or other IRA no later than 60 days after the date you made the withdrawal; and
- You do a tax-free rollover only once a year (the 1-year wait period begins on the date you receive the IRA distribution, not on the date you roll it back).
For many years, the IRS took the position that the 1-year waiting period applied separately to each IRA. Now, following a recent Tax Court case, the IRS says it will treat all of your IRAs as a single IRA for purposes of applying the 1-year waiting period. However, this new rule will not apply to any rollover that involves a pre-2015 distribution.
For example, assume you withdrew the balance from IRA – A in 2014 and rolled it over into IRA – C within 60 days. Later in 2014, you withdraw the balance from IRA – B and rolled it over into IRA – D within 60 days. Neither withdrawal would be taxed because IRA – A and IRA – B are treated separately for purposes of applying the 1-year waiting period. But under the recent Tax Court case and the new IRS guidance, if these rollovers occurred in 2015, all of the IRAs would be treated as one when applying the 1-year waiting period, and only the first withdrawal (from IRA – A) would be tax-free. The second withdrawal (from IRA –B) would be taxed and also could be hit with a 10% early withdrawal penalty. In addition, the rollover of the second withdrawal into another IRA (IRA – D), to the extent it exceeded any allowable regular contribution you could make to an IRA for 2015, would be treated as an excess contribution subject to a 6% tax unless withdrawn by the return due date for the year of the attempted rollover.
Note that rollovers between Roth IRAs are subject to the same 60-day rule and 1-year wait period that apply to rollovers between traditional IRAs. But rollovers from employer retirement plans to IRAs are not counted for purposes of the 1-year wait period, and neither are conversions of regular IRAs to Roth IRAs. Likewise, the 1-year wait period does not apply to trustee-to-trustee transfers between traditional IRAs, or between Roth IRAs.
These revised rules for IRA rollovers reinforce the need to speak with a competent professional before moving around your tax-favored retirement funds. Please call me at your convenience to discuss the revised rules at 937-223-1130 or Jsenney@pselaw.com.
AND ONE MORE THING. Getting divorced from a spouse can be bad. Breaking up with a business partner can be worse. Getting divorced from a spouse who is also your business partner may be the worst. Unless you and your spouse/business partner signed a shareholder agreement that clearly defines transfer of company ownership in the event of a divorce, you are likely to face a costly and time-consuming process involving public hearings, appraisals, arguments over stock and asset valuations and lots of bad publicity. The more publicity the proceedings receive, the more negative news employees, suppliers, and customers learn hear about you and the business, and the greater the risk your business relationships and reputation are damaged. But there is a relatively simple way to avoid all this. See your attorney and get a shareholder agreement prepared and signed. Then if you are faced with a divorce, death, disability, bankruptcy or any other break up trigger event, you have a legal framework that will control the transfer of company ownership from one spouse/partner to the other. Call or email me at Jsenney@pselaw.com or 937-223-1130 for help with drafting or amending your shareholder agreement.