Q. I have four IRAs held with four different financial institutions. I like Sally the person that handles my largest account better than all the others and she keeps trying to tell me to consolidate all of my IRAs with my IRA she manages. I am reluctant to do so because I know it’s not good to have all of your eggs in one basket, don’t you agree? I went in last week to “borrow” from my IRA for 60 days for some home repairs. I have a CD maturing in 45 days and will use that money to pay back my IRA. I’ve borrowed from my IRAs for years and have never been penalized since I always have a plan to pay myself back within the allotted 60 days. In fact, I did this earlier this year from one of my other IRAs to help bridge the gap when I paid cash for a new car and then paid it back when my old car sold. When I went in to complete the paperwork for the distribution Sally ask me if I have taken money out of any of my other IRAs this year. I told her it wasn’t any of her business and she said there are new rules concerning the 60 day rule and that she was just trying to look out for me. I told her that she was just being nosey and trying to get me to consolidate everything with her. She said if I didn’t want her help fine. Needless to say, we didn’t part on very good terms and I’m thinking of transferring my IRA Sally manages to yet another institution. My question, do I need to wait until I’ve paid back the money within the 60 days or can I just get a check for the remaining IRA value and then open up a new IRA elsewhere for the total amount once my CD matures?
A. This wasn’t your question but you owe Sally an apology. She is aware of the new interpretation of the once-per-year 60-day rollover rule and was trying to be helpful not nosey. She should have made you listen to her or sign something acknowledging that you did not want any information.
In the past, the IRS allowed a 60-day rollover once a year from each IRA. So, if you owned four IRAs you could initiate four rollovers in the same year as long as each roll-over was done from separate IRAs. Last year the U.S. Tax Court issued a ruling that the one-year-period rule applies to a person’s aggregate IRAs. The IRS said it would begin enforcing this interpretation of the rule January 1, 2015 and only for roll-overs made in 2015 and thereafter. The one year period is not a calendar year it is once every 365 days. If you took money from another IRA this year and paid it back within 60 days you cannot do another 60-day rollover until 12 months have passed since the distribution. Since you have already done a 60-day rollover from one of your IRAs earlier this year, the distribution you just made from the IRA Sally manages cannot be rolled back into your IRA. The distribution will be taxable and subject to a 10 percent early withdrawal penalty if you are under age 59 1/2. If you try to be clever and put the money back into your IRA Sally manages because her financial institution isn’t aware of your previous roll-over this year, you’ll make matters worse. The IRS will view this as an excess contribution, subject to a 6 percent penalty for every year the funds remain in the IRA. The penalty will be in addition to taxes add any early withdrawal penalty.
The once-per-year rule applies to traditional and Roth IRAs. If you have a traditional and a Roth IRA you can have a 60-day rollover from one or the other within the one year period not both.
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Trustee to trustee transfers do not fall under the once-per-year rule and may be made as often as desired. If an IRA owner receives a check made payable to another IRA custodian, the distribution will be treated as a trustee-to-trustee transfer. The rule does not apply to Roth conversions.
If you still want to move the IRA out from Sally’s management do so via a direct trustee-to-trustee transfer or have a check made payable to another IRA custodian for benefit of you. If the check is made payable to you will have violated the once-per-year rule a second time. You should consider consolidating all of your IRAs with one custodian. The advice to not put all your eggs in one basket is more applicable to an investment type or sector.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624