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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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3 Comments
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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