Retirement Planning Articles
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Watch out: Your IRA Might Bite You
Generally, Individual Retirement Accounts (IRAs) are good things to have. To me, fudge is also a good thing to have (note to self…need to stop by the Pecan Shed), but I can make it bad by eating a pound of it in one sitting or by dropping a piece and smashing it into the rug. So too, you can mess up your IRA.
For instance, when I have people move an IRA, I want them to use a trustee-to-trustee transfer. That is where the money is never constructively received by you, but goes from your previous custodian to your new one. However, lots of people use a 60-day rollover. That’s where the old IRA cuts you a check, you put it in your bank account, and then within 60 days move it into your new IRA. Violate that 60-day rule and you have turned a rollover into a distribution. A distribution that you’ll owe taxes on, and perhaps a penalty.
Or, let’s say that you did the 60-day rollover just fine, but you’re disappointed with the investment. So a few months later, you do another 60-day rollover. Doing so turns your rollover into a distribution. You see, while you can do trustee-to-trustee transfers every day, you are only allowed to do a 60-day rollover once every 12 months. Do it twice and that second rollover gets taxed.
Or, what if you inherited an IRA from your uncle? You decide to do a 60-day rollover to your preferred broker. Sorry, you’re not allowed to rollover an inherited IRA…you have to do a trustee-to-trustee transfer or it will again be considered a distribution. Oh, and if you do that T-to-T transfer but move it into your own IRA, that too is wrong. Only a spouse can move an inherited IRA into her own name. The rest of us need to ensure it is registered as an inherited IRA listing both the names of the beneficiary and the decedent.
And watch out during a divorce (a good rule-of-thumb even when IRAs aren’t involved). Through a court approved divorce decree, one spouse can have part or all of their IRA rolled over to the other spouse as part of the divorce settlement. But if this is done outside of a court approved divorce decree, then it is illegal. That means that the spouse giving up the money has to pay taxes on the distribution and the spouse getting the money can’t move it into their IRA.
As you can see, there are several “gotchas” when it comes to moving an IRA. Make sure you know the rules before you make the move.
This article was published under the title "Moving Your IRA Might Bite You"
in the Wichita Falls Times Record News on 12/18/2011.
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