CD IRA owners: Beware of new rule

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New 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.

Do you shop around for CDs? Here are some tips on getting the best CD rates.

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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.