|by Jeff Reeves, Special for USA TODAY|
An unexpected ruling on tax law regarding IRA rollovers may have just created a headache for a small group of successful savers.
But thankfully, experts agree that most Americans won't be affected.
The kerfuffle involves a recent decision by the United States Tax Court that states a taxpayer can perform only one tax-free "rollover" of an individual retirement account each year — regardless of how many IRAs they may have.
This differs greatly from the widespread perception that a taxpayer can roll over as many IRAs as they want, and that the one-year cooling-off period applied to each individual fund.
"There may be some high net-worth individuals who are worried, but this doesn't impact the typical person at all," Morris said.
"People that go into banks and credit unions and tend to buy a lot of CDs could have multiple bank IRAs," Piershale said. "It used to be they could go in, walk up in the teller line and get a check from one CD and then take it across the street to a bank that offered a CD with a better yield. And as long as you took it to another bank in 60 days, you're fine."
Under new guidelines, that kind of activity could happen only once a year. Still, that doesn't mean seeking out that higher-yield CD is impossible, just "a bit more complex."
"Rather than get a check in your hand, you can do trustee-to-trustee transfers" direct from one IRA provider to another, Piershale said. "If you only do this going forward, you can keep out of trouble easily."
'YOU CAN'T BORROW FROM AN IRA'
In fact, experts say, when you look at the tax court ruling, the decision wasn't so much about IRA transfers but the practice of tapping into IRA money under the guise of a rollover and then having 60 days to play with it tax-free.
In an IRA rollover, investors gets a check for their funds deposited directly to them. They then have 60 days to deposit that money into a new retirement account to avoid any penalties. Any cash not rolled over in time, however, is marked as taxable income by the
By contrast, a direct transfer of IRA funds from one provider to another doesn't allow you to touch a penny of the funds. It is done automatically, and can be done as frequently as you want without penalty.
The fact that some people were withdrawing money from IRAs under the guise of a rollover and then having a "tax-free loan" for 60 days wasn't sitting well with the
"Some people want a short-term loan from their IRA. They say, 'I'll just pay it back in 60 days.' And they've relied on the plain language publication from the
That will stop, going forward.
The bottom line, Morris says, is that "you can't borrow from an IRA. That's not what they're designed for. The sole intent is to put money away until you're over 59½ years old."
If you need an emergency savings account, he adds, there are alternatives like a whole life insurance policy that you can borrow against, or a hardship loan from your 401(k) savings.
WHO IS AFFECTED?
One small group of IRA investors who may be affected are high-net-worth individuals who have structured their portfolio into a series of IRAs.
"It's a very valuable strategy for people that have multiple IRAs with big value to keep them separate, because if you make a mistake it can taint the entire account," Morris said. "So splitting up the money can make sense in these cases. It's like a crab that loses its leg but doesn't lose the whole body."
Navigating the logistics of this under new tax guidelines may be a bit more complicated, but again not a typical case for the common taxpayer.
But perhaps the biggest impact for the typical American is that while this individual ruling may not apply broadly, it doesn't mean we've heard the last rule change on widely accepted tax strategies.
"This is not the first time that the tax court's decision has been contrary to existing
In other words, there may be other commonly held perceptions about the tax code that crumble in the future. And changes could affect far more people.
And if this happens? Simply relying on common-language publications from the
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