Welcome to The Shaw Atlas, the monthly newsletter from Shaw & Associates, CPAs & Financial Advisors. We look forward to keeping you abreast of ever-changing tax codes, providing you with money saving accounting tips and illustrating proactive strategies to help you achieve the financial life you envision.
New Rule – IRA Rollovers
Kevin Shaw, President
Shaw & Associates, CPAs
As we draw closer to being halfway done with the 2016 year, we begin to understand how individual choices can severely impact one’s tax situation. While researching articles on industry rules and changes, I came across an article from Financial-Planning.com, highlighting the effects some clients could potentially experience if they do not follow the new version of the once-per-year IRA rollover rule. I wanted to share the article below as I believe it is important to educate all IRA clients on the seriousness of violating this rule. If you have an IRA, please take time to read this article to understand how to avoid being penalized during tax time.
A FATAL IRA ROLLOVER ERROR
By Ed Slott
“Some clients’ 2015 tax returns are being hit with costly penalties because of a new ruling about the once-per-year IRA rollover rule.
Only one 60-day IRA-to-IRA rollover can be done per year (365 days) by an individual, regardless of how many IRAs he or she holds.
A strict new version of the once-per-year IRA rollover rule has been in effect since Jan. 1, 2015, but some advisers are still making costly errors. Some clients, too, are completely unaware of the new rule. The fallout is happening now after the filing of clients’ 2015 tax returns. This was the first year that a second ineligible IRA rollover would trigger an unwanted tax bill and related possible tax penalties.
Unlike some other tax mistakes, running afoul of the once-per-year IRA rollover rule is a fatal error. It cannot be fixed. IRS does not have the authority to provide any relief on this error.
As a result of a now-landmark Tax Court ruling (Alvan L. Bobrow, et ux. v. Commissioner, TC Memo 2014-21, Docket No. 7022-11, Jan. 28, 2014) and follow-up guidance from IRS in Announcement 2014-32 (issued on Nov. 10, 2014), a stricter interpretation of the rule applies.
In the past, the IRS believed the rule applied separately to each IRA, but that is no longer the case. The new IRS publications make it clear now that the rule applies in the aggregate to all IRAs and Roth IRAs.
It is worth noting at the start what actions these rules do not apply to. Most important, they do not apply to direct transfers from one IRA to another. This is why a direct transfer is the preferred method to move clients’ IRA funds.
The once-per-year IRA rollover rule also does not apply to rollovers from other types of plans to IRAs, to rollovers from IRAs back to plans or to Roth conversions.
Further, the rule does not apply to nonspouse IRA beneficiaries, because they can never do a 60-day rollover anyway. Nonspouse IRA beneficiaries can move inherited IRA funds only using direct transfers. A spouse can do a rollover, but after a spouse’s death, spousal rollovers should also be done as direct transfers.
Thus, the once-per-year rule applies only to indirect rollovers of one IRA to another IRA (or Roth IRA to Roth IRA), often called 60-day rollovers. A 60-day rollover means that the funds were withdrawn by the IRA owner via a check made out to him personally. By contrast, a direct transfer involves a trustee-to-trustee movement, in which the money moves directly from one IRA to another without anyone touching the money in between.
IRS Announcement 2014-32 makes it clear that a check made out to the receiving IRA will qualify as a direct transfer and is not subject to the once-per-year IRA rollover rule. But a check made out to the IRA owner will not qualify for this exception because he or she can cash this check.
The rule now states that only one IRA-to-IRA rollover can be done per year from all IRAs held by an individual, including SEPs, Simple IRAs and Roth IRAs. Note that one year means 365 days, not a calendar year.
Here’s an example: Bob withdraws $50,000 from his IRA on Aug. 5, 2016, and rolls it to another of his IRAs on Sept. 10, 2016 — well within the 60 days. Assuming Bob has not done any other IRA to IRA rollovers during the 365 days before Aug. 5, 2016, then this is a good 60-day rollover. No problem here.
But that is Bob’s one allowed IRA rollover. He cannot do another 60-day rollover from any of his other traditional IRAs, SEP, Simple or Roth IRAs until after Aug. 5, 2017.
If he does, that will be an ineligible rollover and taxable to the extent of pre-tax funds withdrawn and subject to the 10% early distribution penalty if Bob is under age 59 ½ and no exception to the 10% penalty applies.
The action could also be subject to a 6% excess IRA contribution penalty if the ineligible rollover is not timely removed. That would require the filing of Form 5329 to report the excess IRA contribution, if not removed by Oct. 15 of the year after the year the IRA contribution was made for.”
Is your head spinning? As you can see, violation of this new rule can create costly penalties for clients during tax time. It is important to remain educated and seek advice; as it is not a mistake the IRS can fix. If you would like more information or have specific questions on any of these items, please contact me at Kevin@kevinshawcpa.com or (970) 223-0792 ext. 1
Client Spotlight – Goes Funeral Care
We, Chris and Stephanie Goes, started Goes Funeral Care in late 1996 with prayerful optimism and with the belief that we could offer funeral service our way – small, honest, intimate and reasonably priced and could still do all things that the larger funeral homes could do. We added our own crematory in 2000 and additional staff in 2013.
Recently, we went through some updates to our facility coupled with some expansion of offices and specialized rooms to better serve our client families. Goes Funeral Care offers cremations, memorial services, celebratory events, and traditional funerals. We also offer pre-funeral planning with payment plans, and would be considered the area’s expert in Green Burial having been a part of Fort Collins’ creation of a green burial section at their Roselawn Cemetery. Funerals are one of those things kept in the background of most people’s minds. When you are ready to discuss what will happen one someone dies, we are here to compassionately listen and guide you in your loving memories. We like to think of ourselves as the little engine that could and that our business is a ministerial extension of our personal values.
We have used Kevin as our business and personal accountant from the very beginning and remember when he was in an office at his home and drank Tab like a fiend; we guess to keep going because he was a one-man operation. We feel Kevin and his staff at Shaw & Associates are always on the cutting edge of accounting, current of any laws, are very knowledgeable, and are a pleasure to work with. They support small business and non-profits in our community. As both Goes Funeral Care and Shaw and Associates celebrate 20 years of business in 2016, we would like to say thank you to the community as well as to the friendship we have had with the best little accounting business in town – Shaw & Associates.
Business After Hours Tradeshow – THANK YOU!
We would like to thank our wonderful clients BigOTires,Hurr Sprinkler & Landscape,
and Northern Coloradoan Catering for sponsoring some great giveaways at our booth at The Annual Business After Hours Tradeshow. If you were one of the selected winners from the drawing held, please be sure to mention that you stopped by our booth!