Imagine this – after years of working for the same company, you have finally reached the time to retire.  You have worked hard to build your nest egg, and move your 401(k) balance to an IRA at an insurance company.  After a few years of mediocre performance in an annuity, you decide to move the IRA to one of the big, chain brokerage firms to be managed.  Suddenly,  you realize your new financial advisor neglected to ask one small question, and all of sudden the entire balance of your $1 million IRA becomes taxable.  Keep reading, because this happens too often.  Although asset management is my main “wheelhouse” skill, I maintain the College for Financial Planning CRPC designation (Chartered Retirement Planning Counselor).  This is the most important training I receive every two years.  The Department of Labor and the Internal Revenue Service have detailed, ever-changing, and yes, onerous, rules that must be followed regarding retirement plans and IRA’s.  When the rules are broken, there are stiff penalties and fines.  So what happened to your IRA?

In 2014, the IRS changed the rules which permit IRA rollovers.  In the past, the rule permitted one rollover per account.  Now, the IRS limits everyone to one rollover per year regardless of how many accounts you have.  Earlier in the year, you moved a different IRA from your local bank to one of the discount brokerage firms.  The bank mailed the check to you, and in turn you wrote a check to your new brokerage firm to be deposited into your new IRA.  Since your new advisor at the big chain failed to ask if you had rolled over any other accounts earlier in the year, your $1 million IRA no longer exists, and you now owe tax on $1 million.  Adding insult to injury, there may be penalties depending on your age.  There is no fix.  If you try to move the money into an IRA anyway, they will still get you (see below).  If your new advisor knew what he was doing, he could have avoided the situation by completing the transfer from the annuity company as a direct trustee-trustee transfer.  But in his excitement, he did not.  Many do-it-yourself investors who are unaware of the rules have fallen into the same trap.

Let’s no sugar-coat it, this is from the IRS website:

Tax consequences of the one-rollover-per-year limit

Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:

• you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months, and
• you may be subject to the 10% early withdrawal tax on the amounts you include in gross income.

Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:

• treated as an excess contribution, and
• taxed at 6% per year as long as they remain in the IRA.

At Pawleys Investment Advisors, we do not advocate rollovers, and encourage all clients to move assets as a direct “trustee-to-trustee” transfer.  As an example, if I moved my old IRA from the bank to my Charles Schwab IRA, I would ask the bank to make the check payable as follows: “Charles Schwab for benefit of Kathryn Schwartz IRA.”  I would also ask them to mail the check directly to Schwab.  Depending on the financial institution you may be required to obtain a Signature Guarantee, but it is worth the extra time and effort.  See the full rules below, and e-mail us with any questions!  Also, be sure you have a really great CPA to help you navigate these issues.

https://www.irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule

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