Suppose you need cash for a medical emergency. You can tap
your IRA, especially if you plan to repay your account.
The key is to repay the money within 60 days. In IRS jargon,
that's an IRA-to-IRA rollover.
If you return the cash within 60 days, you won't owe any tax,
and your ongoing IRA earnings are still tax-deferred. You can do
this kind of rollover only once per year.
You used to be able to do it with every IRA you own, based on
an IRS rule.
But recently the U.S. Tax Court said that no matter how many
IRAs you have, you can do only one rollover a year. The IRS will
apply the Court's directive starting in 2015, so there is still
time to move some money around if you wish.
Should you? Here are the basics.
Say that a hypothetical Jill Wilson needs $50,000 in a few
days to close a business deal. Wilson has no other liquid assets
to tap. So she pulls $50,000 from her IRA on Sept. 2.
Wilson has 60 days to restore the $50,000. Until Nov. 1, she
can put that $50,000 back into her IRA or another IRA she owns or
such as a 401(k).
If Wilson meets the deadline, she won't suffer adverse tax
consequences. But missing the deadline will add the $50,000 to
Wilson's taxable income. And she might owe a 10% early-withdrawal
penalty if he's younger than age 59-1/2.
But what if Wilson has multiple IRAs? The IRS used to allow
Say that Wilson rolled her $50,000 from an IRA at the XYZ
Mutual Fund Firm to a new IRA that she created at the ABC Mutual
Fund Firm. Wilson could do another rollover from an IRA she held
at a third
firm -- under the old IRS rule.
But the Tax Court saw things differently when judging a
dispute between the IRS and tax attorney Alvan Bobrow.
In April and June 2008, Bobrow had taken distributions from
two IRAs he owned. He replaced them both within 60 days from
other accounts, as the IRS required.
But the Tax Court ruled, "Regardless of how many IRAs he or
she maintains, a taxpayer may make only one nontaxable rollover
contribution within each one-year period."
As a result, the IRS said that it will reword the rule in
question and follow the one-per-year rule for all IRA-to-IRA
The new rule won't apply to IRA distributions before 2015. So
you have until year-end to initiate multiple IRA rollovers, and
you should meet the 60-day test for any rollovers already
Don't worry about running afoul of the Tax Court for multiple
rollovers before 2015. You get into the court only by petitioning
for a hearing to contest an IRS notice.
And there are legal loopholes. The new rule doesn't apply to
rollovers between IRAs and employer plans such as 401(k)s. It
doesn't apply to Roth IRA conversions. Nor does it apply to
transfers performed by financial institutions. You can move money
from one IRA to another in a direct transfer -- sometimes called
a trustee-to-trustee transfer -- without ever putting the IRA
money into your pocket, as many times as you want, without
violating the new rule.
For those transactions, there is no limit to how often you
move your money around.