IRA rollovers can be beneficial, but be careful

Q Is it true that while you cannot take out a loan against an IRA, you can make a withdrawal and simply put it back?

A Individual retirement accounts (IRAs) continue to comprise the bulk of many physicians’ retirement planning assets. They are often hesitant to make any changes to these IRAs, including taking withdrawals or moving their account to another adviser, due to the perception that various taxes and penalties would be incurred.

There are, however, several reasons why rolling over your IRA funds may make sense. You may be dissatisfied with the investment return from the IRA or are interested in pursuing other investment opportunities. Another reason might be the need for immediate cash. Loans against an IRA are not allowed, but many investors are unaware that if you withdraw funds from an IRA but redeposit the funds back into an IRA within 60 days, there are no current income tax ramifications. When all of the requirements are met, IRA rollovers are tax free and exempt from the usual 10% penalty on early withdrawals before age 59½ years. 

However, it is important to keep in mind several potential pitfalls with IRA-to-IRA rollovers:

Missing the 60-day rollover period. The rollover must be completed within 60 calendar days after the date you receive a distribution from the old IRA. For years, the Internal Revenue Service has ruled the 60-day requirement could not be waived-even when the delay was not the taxpayer’s fault. Recently, the IRS has indicated that it’s more willing to grant an exception or waiver under extenuating circumstances, but it is still best to play it safe and stay within the 60-day rollover period.

Failure to roll over the same assets that were distributed. To qualify for a tax-free rollover, the cash or other assets withdrawn from the old IRA must be transferred within 60 days. You are not allowed to substitute other property. For example, in a recent tax court case, an individual withdrew cash from his IRA and used the money to invest in common stocks. He then transferred the stocks to a new IRA within the required 60-day rollover period. The tax court ruled that the transfer was taxable, since there was a change in the distributed assets.

Rolling over to the wrong IRA. The tax-advantaged rollover is valid only if you make a timely rollover to an IRA that you personally own. If you mistakenly transfer the rollover funds to your spouse’s IRA or some other account, the transfer is fully taxable.

Initiating more than one rollover during the year. You are allowed to roll over funds from one IRA to another IRA only once per year. The 1-year period begins on the date you receive the distribution, not the date on which you roll over the funds into the IRA. The 1-year rollover rule applies separately to each IRA that you own. One way to avoid this restriction is to utilize a “trustee to trustee” transfer of IRA assets from one IRA to another IRA.

Rolling over a “mandatory distribution.” The law requires you to begin minimum distributions from an IRA by April 1 of the year following the year in which you reach age 70½ years. You cannot avoid the minimum distribution rule by rolling over the distribution to another IRA. Mandatory distributions may be avoided if the retirement plan assets are not held within an IRA but are kept within the plan, and you have not yet retired. This exception, however, is not available for distributions made within an IRA.

Rolling over IRA assets to a Roth IRA. In general, the rollover from a regular IRA to a Roth IRA is completely taxable.

Rules impacting IRAs are numerous and also frequently complex. Be sure to consult with your tax and financial advisers prior to making any changes with your current retirement accounts to ensure you are maintaining all tax advantages.

Q What is the new estate tax exemption for 2013?

A The American Taxpayer Relief Act of 2012 impacted estate tax law, in addition to income taxes, by making the federal gift, estate, and generation-skipping transfer (GST) tax provisions permanent. The federal gift and estate tax exemptions remain at $5 million per person, adjusted annually for inflation, bringing the 2013 exemption amount up to $5,250,000. The GST tax exemption is also $5,250,000, allowing many to take advantage of estate-planning techniques that will greatly benefit future generations. It is important to keep in mind that “permanent” in tax law often means “until Congress decides to change it again.”