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CD IRA owners: Beware of new rule

By Sheyna Steiner · Bankrate.com
Tuesday, September 2, 2014
Posted: 6 am ET

© PathDoc/Shutterstock.comNew rules around rollovers of individual retirement accounts could bite the owners of certificate of deposit IRAs next year. A tax court ruling earlier this year decided that only one 60-day rollover between IRAs will be allowed in a one-year period, that is a 365-day period from the day the rollover is initiated. The new rule goes into effect Jan. 1, 2015.

A story on the website for the Bradenton Herald, "Perils of IRA rollovers," brought up a great point this week. Seniors accustomed to moving CDs from bank to bank while chasing the best CD rates may be caught off guard by the new rule.

Before the tax court ruling, the understanding was that everyone could do one 60-day rollover per year per account.

Now, however, going from bank to bank to purchase CDs, within an individual retirement account umbrella, may trigger a disastrous taxable event. Under the new IRS IRA rollover rules, you can only have one non-trustee-to-trustee transfer in a 12-month period.

That doesn't mean savers can't bounce from bank to bank as they search for better CD rates. Instead of having a check made payable to the owner of the account, do a trustee-to-trustee transfer. That way the bank will handle the transfer of the money.

Savers who unintentionally fall afoul of the new rule could wind up with a huge tax bill after inadvertently cashing out their entire IRA. Those under 59 1/2 could be subject to a 10 percent penalty on top of the taxes owed.

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***
Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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7 Comments
Sheyna
January 26, 2015 at 9:05 am

Leila I'm so sorry to hear that. That is heartbreaking. I'm sorry your bank steered you in the wrong direction. The best advice I have is to contact the taxpayer advocate service at the IRS first of all.
http://www.irs.gov/Advocate

I'm not sure how the IRS will deal with deal with this rule change but the people at the advocate service should be able to tell you the best course of action. You could employ the services of a lawyer to file a private letter ruling if its a lot of money and it makes sense to pay for the preparation. It could cost a few thousand dollars. Best of luck.
http://www.bankrate.com/finance/retirement/correct-ira-with-private-letter-ruling.aspx

Leila Mustachi
January 24, 2015 at 10:50 pm

On Jan. 13, 2015, 2 IRA CDs expired at Flushing Bank. I was told by that bank and by another bank, Apple Bank, that I would have no IRS tax problem if checks for both IRA accounts were made out to me and I walked them over to the new bank. This is what I did. Two days later, on Jan. 15th, I took the checks to Apple and deposited both checks as rollover IRA CDs. Tonight I heard that there is a new IRS ruling and that they both told me the wrong thing and that I will have a terrible tax problem because only one rollover is allowed in the same year and I did both together. I am 81 years old and do not understand the new law much as I try. Please tell me as I am deeply distressed.

Sheyna
November 24, 2014 at 9:10 am

Hi Bill,
Thanks for reading and writing. The once-per-year transfer only applies to the 60-day rollover variety. That means a check would be made out to you and you take it to the new financial institution. It limit does not apply to trustee-to-trustee transfers where the financial institutions handle the money, you can do as many of those as necessary.

Bill
November 22, 2014 at 1:04 am

I have a Thrift Savings Account as a retired Federal Government employee.

I have elected to transfer my TSP to a Roth IRA in 120 monthly payments (based on the yearly balance).

How would this impact me if I can only do one tranfer per year?

Thanks.

Nichols
September 19, 2014 at 2:18 pm

You article is troubling to me as it refers only to IRA CDs. The new rule applies to all type of IRAs. For example, I have an IRA invested in stocks. I cash them in redeposit the cash and purchase more stock. Wouldn't that rule apply as well?

Rick Z
September 04, 2014 at 10:36 am

Good point, Sheila D. My first thought when I started reading the article was, Just do a trustee-to-trustee transfer. But back when I used bank CDs for IRA accounts (when interest rates were much better), these were often free or at negligble cost. Now, I consider mutual funds a better home for my IRA. But to be fair to the banks, I think the complexity of government regulations on handling IRAs does entitle them to some compensation. Maybe when IRAs first started, they didn't yet realize how burdensome they would be.

Sheila D.
September 02, 2014 at 9:25 pm

For those of us who have IRA CD ladders, this is going to get expensive. Citibank (for example) charges a $75 fee to do a Trustee to Trustee transfer, which is a lot for (say) a $5000 CD. I suspect other banks will take similar advantage, and jack up their fees accordingly.

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