Many senior citizens invest in certificates of deposits (CDs) as part of their retirement nest egg. When a CD matures in an IRA account, some seniors will search for the bank that is paying the highest interest rate and then rollover the maturing CD to the new bank. The rollover was done by receiving a check from the “old bank” and investing those monies in a CD with the “new bank”. This practice may now result in a taxable event! Why?
It had been the position of the IRS, as stated in its Publication 590, that a taxpayer was allowed one tax-free rollover for every IRA account held by the taxpayer. Thus if the taxpayer had 12 CD IRA accounts, the taxpayer could rollover any and all twelve of the CD IRAs into another IRA without incurring a taxable event in any 12-month period. The Tax Court in A. L. Brobrow (107 TCM 1110, Dec. 59,823(M), TC Memo 2014-21) found that the IRS had misinterpreted the law. The Court ruled that the limitation applies on an aggregate basis, so that an individual cannot make a tax-free IRA-to-IRA rollover if the individual had made such a rollover involving any of the individual’s IRAs in the preceding one-year period. In other words, a taxpayer is allowed only one tax-free rollover during any twelve-month period regardless of how many IRAs the taxpayer maintains.
Due to the unexpected result of this Court ruling, IRA trustees will need to make changes in the processing of IRA rollovers and in IRA disclosure documents. Accordingly, the IRS is delaying the implementation of the Bobrow decision until January 1, 2015 and will revise its Publication 590 to reflect this Court ruling.
Is there a way around this? Yes, rather than the individual withdrawing the maturing CD proceeds and moving those funds himself to another bank, the CD holder needs to instruct the bank holding the maturing CD to directly transfer those funds to the bank with the higher rate of interest. Why does this work? Because the direct transfer of IRA monies from one trustee to another is not considered a rollover, it is therefore not subject to the one-per-year limitation. In addition, this court finding does not affect transfers from a 401(k) plan that are rolled over to an IRA and then are rolled over again to another employer’s 401(k) plan.
It is situations like this that taxpayers who are not kept abreast of the tax laws are surprised to learn of the adverse consequences of their actions. This is a good example of why taxpayers should not limit their tax professional to only tax preparation services. If one engages their tax professional for tax planning and retirement planning, they can avoid these unpleasant and sometimes costly events.
I was listening to Charles Barkley on the radio last week. For those who don’t know “Sir Charles”, he played for the Philadelphia 76ers and is a very entertaining and sometimes controversial personality. When Charles was asked about how he handles his investments, he said that everything he does is reviewed by his attorney, financial advisor, and his accountant. This is good advice for all to follow. Are you doing this?
If you want to learn more about your personal tax, financial or retirement situation, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.