IRA Rollover Rule Changes – What You Need To Know

The U.S. Tax Court recently changed the rules with respect to IRA rollovers big time. Once those changes take effect, it will be much harder to use your retirement assets to cover a short term need unless you are willing to pay taxes and penalties

The Background

Up until now, taxpayers were allowed to withdraw money from their IRAs and pay no tax or early withdrawal penalties so long as they put the money back within 60 days. Many people took advantage of those rules when they needed short-term loans. Let me give you an example.

Let’s say you need $15,000 to buy a car because your old jalopy finally went kaput. The problem is you need the car now but your money won’t be available for another 2 months.

The solution? Tap into your IRA. As I said, as long as you put that money back into your IRA within 60  days, you won’t pay a dime in taxes or penalties.Some people took this tactic “to the next level” by setting up multiple IRAs at various custodians. They took out one IRA loan to pay a debt. The 60 day period was up so they tapped into a different IRA to pay the money back into the first IRA.

They kept playing Ring Around The IRA indefinitely which was cool for them but the IRS wasn’t amused. Starting in 2015 IRA holders aren’t able to do that anymore.That’s right. Starting now,you’ll only be able to do rollover of this type once per year. Sorry Charlie.

Who This Doesn’t Affect

This change only applies to IRA money you take possession of. If the IRA money goes from one custodian to another, that’s considered a direct transfer or trustee to trustee transfer and you can do that as many times as you like within a year.

Also, you can transfer money from your IRA to a 401k or vice versa as often as you like. As long as you don’t have possession of the money you won’t have to worry about paying taxes or penalties.

Why This Should Be Nothing You Need To Worry About

First and foremost, if you are on top of your finances, you shouldn’t need to borrow from your retirement accounts. I admit that there can be unexpected emergencies. And even if you put aside adequate emergency funds, sudden and prolonged unemployment and/or a serious illness can be a serious blow. In these circumstances your IRA money may be your only or last resource. That’s right. Stuff happens.

So if you are reading this and your fortunate enough not to be in such a dire position, take the appropriate steps to protect yourself and your retirement funds:

• Get your spending under control and set up a smart budget.
• Stay out of debt.
• Have adequate life insurance and disability coverage.
• Have enough set aside for emergencies.
• Automate your savings and investing.

IRA money is supposed to help you have a more secure retirement. If you spend it now, the IRA won’t be there when you need it most. Take the proper steps now and do all you can to make sure you won’t have to tap into your retirement for emergency bailouts. I know that money looks pretty juicy just sitting there but it can jeopardize your future if you start borrowing that money.

Have you ever borrowed against your IRA? Why? Did you pay it back?