It's not unusual for a retiree to own multiple IRA certificates
of deposit at once. When one CD matures, the bank will likely close
the IRA and hand you a distribution check. You then roll the money
into a new IRA CD, often at another bank that's offering a higher
interest rate. You repeat the process when the next CD expires. A
new court ruling, however, can foul up the process.
Until recently, if you owned more than one IRA, you could roll
over each one once a year. As long as you completed the switch
within 60 days of the payout, there was no tax. Now, thanks to a
U.S. Tax Court opinion, such IRA CD rollovers could be "very risky"
for older investors, says Natalie Choate, an estate-planning lawyer
with Nutter, McClennen and Fish, in Boston.
The court ruled that the once-a-year rollover limit applies to
the investor, not to the individual IRA. No matter how many IRAs
you own, only one rollover is permitted in any 12-month period. The
IRS announced it will not enforce the ruling until 2015.
You can avoid trouble by using direct IRA-to-IRA transfers
rather than 60-day rollovers. With a transfer, the first bank with
the maturing CD sends the money directly to the second bank, and
you are never in possession of the money. "You can make as many
direct transfers in a year as you want without any worries," says
Jeffrey Levine, IRA technical consultant with Ed Slott and Co., in
Rockville Centre, N.Y.
To use the direct-transfer method, first find out when your CD
matures. Then find a bank with a better rate. Before the old CD
comes due, open an IRA at the second bank and ask about any
paperwork you must fill out to transfer the money. Make sure the
second bank does not send the paperwork until the CD matures, or
you'll likely pay an early-withdrawal penalty. If you want to stick
with the same bank, ask about its transfer procedure.
Although the IRS says it will hold off enforcing the new rule,
Levine encourages IRA owners to follow it immediately. It's unclear
when the 365-day clock begins. For instance, if you do a rollover
in September this year and then another in March, it's possible the
IRS could look at the March rollover as the second one in the