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Think twice before rolling over more than one IRA.

New tax-court ruling could have major financial repercussions.

Individual Retirement Accounts are important to current—and future—retirees. Since it was introduced back in 1974, the IRA has become America’s leading retirement savings vehicle, with total assets exceeding those in 401(k)s and even traditional pension plans.1 In fact, these plans have become so popular that many Americans have multiple accounts with varying investment objectives.

Rollovers limited to one per year—not per account.

While it is completely legal to own multiple IRAs, a recent tax-court decision may change how Americans move money from one account to another. According to the ruling handed down in Bobrow v. Comm’r, T.C. Memo 2014-21, IRA owners are allowed to make only one tax–free rollover per 12–month period—regardless of the number of accounts they own.2

Ruling changes years of accepted practice.

This decision came as a surprise to accountants, financial planners, and other tax specialists, who typically follow the guidelines established in IRS Publication 590. These guidelines clearly state that IRA owners are allowed one tax-free rollover per account during any 12–month period.

No limit on direct transfers.

If you own multiple IRAs and want to move money among them, it’s important to use direct transfers—not rollovers—in order to avoid potential tax penalties.

What’s the difference? Here’s a quick summary:

Direct transfer – This is an electronic transaction between two accounts. You, the IRA owner, never touch the money—it simply passes from one IRA to another. There are no tax consequences, no limits to the number of direct transfers you are allowed, and you do not have to report them on your income tax return.

Rollover – In contrast, a rollover is considered a distribution, so the money is paid directly to you and must be reported on your income tax return. If you do not want to pay taxes or penalties on this money, you have 60 days to reinvest it into another IRA or other tax–qualified plan. Note: you will be required to use IRS Form 5498 to document the rollover.

Consider the potential consequences.

As a result of this ruling, anyone who initiates more than one rollover in a 12–month period will face the same consequences as someone who fails to complete a rollover within the 60–day window mentioned above:

  • Since the rollover is considered a distribution, the entire amount becomes taxable.
  • If you are under the age of 59½, you will generally have to pay a 10% penalty tax on the rollover amount.
  • A contribution of the rollover funds to an IRA may result in an annual 6% excess contribution penalty tax.

What’s more, these taxes and penalties will apply to every additional rollover you make, so the financial impact could be considerable.

Know your options.

At New York Life, we know how hard it can be to set aside money for retirement, and we think you should be able to keep as much of it as possible. If you have multiple IRAs, please make sure that your accountant, financial planner, and/or tax advisor are aware of this new ruling.

To learn more about IRA rollovers, or retirement planning in general, call your New York Life agent, or complete the form on the right.

This material is provided for general informational purposes only. This material includes a discussion of one or more tax-related subjects. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals.

Neither New York Life Insurance Company nor its agents provide tax or legal advice. Please consult your own tax or legal advisor to find out more about the personal consequences of the general subject matter of this article.

When considering rolling over the proceeds of your retirement plan to another qualified option, such as an IRA, SEP SIMPLE IRA, Roth IRA, or other type of qualified account, please note that you have the option of leaving the funds in your existing plan or transferring them into a new employer’s plan. You should consult with the Human Resources Department of the applicable employer to learn about the options available to you under your plan and any applicable fees and expenses. Tax consequences may apply if you were to withdraw funds and there are additional tax consequences for transferring stock out of your retirement plan. You should also know that depending on the state where you reside, assets held in a retirement plan may enjoy greater protection from creditors than in other types of tax-qualified vehicles. You should also consider the different types of fees and services which apply to your plan and compare them to any new option which you are considering.

1“Retirement Security Data Brief,” Urban Institute, no. 6, April 2013
2In Announcement 2014-15, the IRS announced that it will follow the Tax Court’s decision in Bobrow, but it will not enforce it until January 1, 2015.