At this time of the year, many taxpayers are thinking about IRAs. And, with the new "Roth" IRAs and education IRAs, more press attention than ever is focused on the importance of IRA planning.
What taxpayers too often ignore, however, are all the tricks and traps associated with IRA ownership.
Take the case of the taxpayer who wants out of an existing IRA--and fast. She's been told that a trustee-to-transfer is quick and foolproof. And she knows that such a "direct transfer" avoids any income tax, any tax reporting and all the rules surrounding IRA-to-IRA rollovers.
But, for her, time is of the essence. She wants to jump on a new investment opportunity faster than a direct transfer can be accomplished. Or she needs cash for an emergency and plans to borrow her own money tax-free and roll it back into an IRA within the 60-day limit.
She--and you--should know that the IRA rollover rules are unforgiving. A brand-new Tax Court case underscores the point. It holds that a cash distribution from an IRA (or Keogh account) must be recontributed in cash within 60 days to an IRA for a rollover to be tax-free. Buying stock (or anything else, for that matter) with the payout and contributing it to an IRA simply won't work. Such a distribution will be fully taxable.
And 60 days means 60 days. No matter if the taxpayer did her best to comply; no matter even if missing the deadline is absolutely outside the taxpayer's control. In fact, the IRS has ruled (in the case of a hurricane, no less) that it has no power to delay the deadline administratively.
In an extraordinary opinion, the Tax Court did rule that a custodian's bookkeeping error (which resulted in an IRA rollover being credited to its owner after 60 days) didn't kill the rollover. But even then the Court was very specific: as a matter of law, the taxpayer did in fact own the IRA rollover within 60 days and, if he hadn't, the time limit--and the tax-free rollover--wouldn't have been honored.
Tax-free rollovers are only available to one's own account. So, a taxpayer who transferred her IRA assets to her husband's IRA has made a taxable distribution. An IRS letter ruling concludes that the usual rule which ignores gain or loss on the transfer of property between spouses is trumped by the principle that distributions out of IRAs--unless they meet all the technical requirements of a rollover--are taxable.
Finally, tax-free rollovers are available only once a year for each IRA, starting on the day the taxpayer receives the distribution. And a taxpayer who owns a SIMPLE IRA is eligible for a tax-free rollover into a regular IRA only after he or she has participated in an employer-sponsored salary reduction plan for at least two years.
The IRA owner has a daunting challenge--meeting his or her retirement objectives while not running a foul of increasingly arcane tax rules. Seeking counsel who knows how to achieve both goals is probably a prudent idea for most taxpayers.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.