Avoid Rollovers of IRA CDs
A new tax rule could create problems for investors who roll money from matured IRA certificates of deposit into new IRA CDs.
It's not unusual for a retiree to own multiple IRA certificates of deposit at once. When one CD matures, the bank will likely close the IRA and hand you a distribution check. You then roll the money into a new IRA CD, often at another bank that's offering a higher interest rate. You repeat the process when the next CD expires. A new court ruling, however, can foul up the process.
Until recently, if you owned more than one IRA, you could roll over each one once a year. As long as you completed the switch within 60 days of the payout, there was no tax. Now, thanks to a U.S. Tax Court opinion, such IRA CD rollovers could be "very risky" for older investors, says Natalie Choate, an estate-planning lawyer with Nutter, McClennen and Fish, in Boston.
The court ruled that the once-a-year rollover limit applies to the investor, not to the individual IRA. No matter how many IRAs you own, only one rollover is permitted in any 12-month period. The IRS announced it will not enforce the ruling until 2015.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You can avoid trouble by using direct IRA-to-IRA transfers rather than 60-day rollovers. With a transfer, the first bank with the maturing CD sends the money directly to the second bank, and you are never in possession of the money. "You can make as many direct transfers in a year as you want without any worries," says Jeffrey Levine, IRA technical consultant with Ed Slott and Co., in Rockville Centre, N.Y.
To use the direct-transfer method, first find out when your CD matures. Then find a bank with a better rate. Before the old CD comes due, open an IRA at the second bank and ask about any paperwork you must fill out to transfer the money. Make sure the second bank does not send the paperwork until the CD matures, or you'll likely pay an early-withdrawal penalty. If you want to stick with the same bank, ask about its transfer procedure.
Although the IRS says it will hold off enforcing the new rule, Levine encourages IRA owners to follow it immediately. It's unclear when the 365-day clock begins. For instance, if you do a rollover in September this year and then another in March, it's possible the IRS could look at the March rollover as the second one in the 12-month period.
Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Published
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Published
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Five Ways to a Cheap Last-Minute Vacation
Travel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
By Vaishali Varu Last updated