Worries about bank failures and the stability of other financial institutions are all over the news lately. Clients with individual retirement accounts at a bank might be concerned about them. But retirement accounts are federally insured up to $250,000 per bank.
Congress raised the limit from $100,000 in 2006. (For non-retirement accounts, the Federal Deposit Insurance Corp. or the National Credit Union Administration limit remains at $100,000.)
The $250,000 limit for federal deposit protection applies to retirement accounts at banks and savings associations insured by the Washington-based FDIC as well as credit unions insured by the Alexandria, Va.-based NCUA. The insurance coverage applies to traditional and Roth IRAs, simplified employee pension IRAs and savings incentive match plans for employees IRAs.
Under the FDIC/NCUA rules, all of an individual's retirement accounts at the same insured bank are added together and insured up to $250,000.
Moreover, retirement accounts are separately insured from any other deposits the client has at the same institution. The insurance for the non-IRA accounts is in addition to the $250,000 of insurance for retirement accounts at Bank ABC.
Now, of course, comes the tricky part. Say your client has a $600,000 IRA at Bank A. The client is now worried about FDIC coverage, so they decide to move $200,000 of the IRA to Bank B and $200,000 to Bank C.
If that is the plan, be careful. Ask for trustee-to-trustee transfers from one bank to another.
That is always the safest way to avoid tax problems, but that assumes that the bank will be willing and able to transfer the IRA funds directly to another bank. If you are uncertain that such a transfer will be implemented, the client might prefer simply to withdraw funds from the bank now holding the IRA so they will have the money in hand.
Suppose, in the example above, the client withdraws $400,000 from Bank A. The client then has 60 days to redeposit the funds into Bank B, Bank C or some other institution that will hold an IRA.
This type of transaction, in which the IRA money is withdrawn and put back into tax-deferred territory within 60 days, is a rollover. For each IRA, you can do this no more than once every 12 months (the once-per-year IRA rollover rule).
If the client has done a rollover to or from an IRA within the past 12 months, they must wait until 12 months have passed before doing a rollover from the same IRA.
What happens if the client violates the 12-month rule?
The client will owe income tax on the second withdrawal, plus a 10% penalty if he or she is under 591/2, and those funds are will no longer be IRA funds. As you might expect, there are exceptions to the 12-month rule.
A Roth IRA conversion within 12 months won't jeopardize an IRA rollover. Neither will a transfer or a rollover from a company plan such as a 401(k) to an IRA.
Here is an example. Denise has $600,000 in an IRA in Bank A.
Of that $600,000, $150,000 comprises long-term funds, while $450,000 is from a 401(k) rollover she completed in July. Denise won't have any problems if she does a rollover from that IRA within the next 12 months, since the 401(k) rollover doesn't count toward the once-per-year limit.
On the other hand, suppose that original $150,000 includes just $200 from an IRA rollover done March 15. Now Denise will have to wait until the next March 15 to do another rollover from that account.
Even $1 of rollover funds will mean that no other rollovers can be made from that account for one year. If she does a $200,000 rollover in October, for instance, she will owe tax and perhaps a 10% penalty on the $200,000 withdrawal.
The bottom line, then, is that you must check the history of each IRA before determining whether the client can do a rollover from it.
The same consequences apply if the client withdraws IRA money and fails to complete a rollover within 60 days. Under some circumstances, you can ask the IRS for a waiver, but if it is denied, the client will owe income tax, penalties and interest on the income tax, and perhaps the 10% penalty.
There is no IRS relief on the once-per-year IRA rollover rule, so be careful and warn clients before they move IRA funds.
Ed Slott, a certified public accountant in Rockville Centre, N.Y., created The IRA Leadership Program and Ed Slott's Elite IRA Advisor Group to help financial advisers and insurance companies become recognized leaders in the IRA marketplace. He can be reached at irahelp.com.
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