An alert for people who use CDs for their IRAs

John Kincaid

John Kincaid

Do you like to shop around online for the best CD rates? Do you have a habit of moving certificates of deposit from bank to bank in pursuit of better yields? If you do, you should be aware of an obscure but important IRS decision, one that could directly impact any IRA CDs you own.

Pay attention to the new, tighter restrictions on 60-day IRA rollovers.

This is when you take possession of some or all of the assets from a traditional IRA you own and deposit them into another traditional IRA (or for that matter, the same traditional IRA) within 60 days.

By making this tax-savvy move, you exclude the amount of the IRA distribution from your gross income.

For decades, the IRS had a rule prohibiting multiple tax-free rollovers from the same traditional IRA within a 12-month period. For example, an individual couldn't make an IRA-to-IRA rollover in November and then do another one in March of the following year using the same IRA.

This didn't present much of a dilemma for people who owned more than one IRA, of course. If they owned five traditional IRAs, they could potentially make five such tax-free rollovers in a 12-month period, one per each IRA. Internal Revenue Code Section 408(d)(3) allowed that.

Those days are over. Thanks to a 2014 U.S. Tax Court ruling (Bobrow v. Commissioner, T.C. Memo. 2014-21), the once-a-year rollover restriction will apply to all IRAs owned by an individual starting January 1, 2015. Next year, you'll be able to make a maximum of one tax-free IRA-to-IRA rollover, regardless of how many IRAs you own.

If you have multiple IRA CDs maturing, you could risk breaking the new IRS rule. When a CD matures, what happens? Your bank cuts you a check, and you reinvest or redeposit the money.

When this happens with an IRA CD, your goal is to make that tax-free IRA-to-IRA rollover within 60 days. In accepting the check from the bank, you touch those IRA assets. If you fail to roll them over by the 60-day deadline, those IRA assets in your possession constitute taxable income.

So if the new rules say you can only make one tax-free IRA-to-IRA rollover every 12 months, what happens if you have three IRA CDs maturing in 2015? What happens with the two IRA CDs where you can't make a tax-exempt rollover?

Here is how things could play out for you. You could end up with much more taxable income than you anticipate: the money leaving the two other IRA CDs would constitute IRA distributions and be included in your gross income.

If you are not yet age 59½, you could also be hit with the 10-percent penalty on early IRA withdrawals.

Is there a way out of this dilemma? Yes. This new IRS rule doesn't apply to trustee-to-trustee transfers of IRA assets. A trustee-to-trustee transfer is when the financial company hosting your IRA arranges a payment directly from your IRA to either another IRA or another type of retirement plan. So as long as the bank (or brokerage) serving as the custodian of your IRA CD arranges such a transfer, no taxable event will occur.

Speaking of things that won't change in 2015, two very nice allowances will remain in place for IRA owners. You will still be able to make an unlimited amount of trustee-to-trustee transfers between IRAs in a year, as well as an unlimited number of Roth IRA conversions per year.

John B. Kincaid may be reached at 928-284-3636 or johnkincaid@ceteraadvisors.com, www.kincaidfinancial.com

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