What To Know About Changes To Individual Retirement Account Rollover Rules
Individual retirement accounts, usually called IRAs, have helped Americans save for retirement since the 1970s. Both traditional and Roth IRAs offer tax advantages that encourage taxpayers to set aside money for the future. The Internal Revenue Service, or IRS, may also impose penalties on people who withdraw their funds too early; however, the rules do allow account owners to transfer their funds from one type of account to another. Moving funds from one IRA account to another is called a rollover.
Rollovers always had some restrictions. The thing to note is that the language of the rollover rules hasn’t changed, but the way that the IRS is now interpreting these rules has changed. This reinterpretation was published in 2015 for the 2014 tax year. That was considered a transition year, so there was somewhat more flexibility. Moving ahead into 2016, the transition is over, so people with multiple IRA accounts need to take this change seriously.
What Changes to IRA Rollovers Should Account Owners Understand?
In the past, IRA holders could close out one account, take a check, and then use that money to fund another qualified account within 60 days with no penalty. Before 2014, the IRS only allowed one transfer per year from one specific account to another. However, nothing prevented people from using multiple accounts to make multiple transfers each year.
For example, an account owner could take cash from an account to transfer funds from a first account to second account. In the same year, he or she could also do the same to transfer funds from a third account to a fourth account. There was no limit on the number of accounts that savers could use for transfers. Now, the IRS only allows one cash transfer per year, and the number of accounts doesn’t matter.
here are still some exceptions to this limitation. Custodian-to-custodian transfers are still unlimited. Also, people with traditional IRAs can convert them into Roth IRAs without raising a red flag. The change isn’t meant to keep people from rolling over their money. It’s meant to keep them from withdrawing cash from an account in order to do it.
Why is This Reinterpretation of the Rules Important?
Apparently, this reinterpretation of the rules was meant to stop people from getting the cash from the IRAs in their hands too early. It’s possible that some folks set up multiple accounts and used the loophole as a way to give themselves short-term loans. If an account holder split savings into several different accounts, it’s possible that savers could have kept up a string of cash rollovers that meant that he or she would always have use of the cash that was supposed to be tucked into a retirement savings account.
Violations of this new rule could result in penalties and having to report the rollover as income. For more information, Americans can visit IRS.gov and search for information on IRA rollovers.