As you know, the federal income tax code is a dynamic set of laws and regulations, and every year brings about changes. For example, you’re probably already well aware that the income limits for self-directed IRA contributions and/or deductibility tend to increase every year, and the annual contribution limits increase over time as well.
A Clarification on Rollover Rules. One of the biggest “changes” to the rules relating to self-directed IRAs is actually in the nature of a clarification of an existing rule. Any current IRS regulations allow IRA holders to make, once a year, a rollover between accounts and take possession of the rollover proceeds individually, provided that they re-deposit those funds into their new account within a 60 day period. Many individuals interpreted this annual rollover limit to apply on an account by account basis, meaning that if they held multiple IRAs, they could make the same number of rollovers, provided that no account was rolled over more than once per year.
The Tax Court clarified that this rollover rule actually applies per account holder, meaning that the individual can only make one IRA rollover per year, regardless of the number of accounts they hold. The clarification was meant to address perceived abuses by some individuals who would open a large number of IRAs and then use the 60-day rollover provision to essentially make interest-free short-term loans to themselves without any negative tax consequences.
The Tax Court further clarified that the 12-month period of limitation does not mean merely once per calendar year. Rather, after a permitted rollover, the individual cannot make another until after 12 months, even though that period will likely extend into the next calendar year.
Note that direct custodian to custodian transfers are not affected and you can make direct rollovers as frequently as you’d like. This means that this new clarification should not impact your ability to roll your existing accounts into a single self-directed IRA, provided that the rollover is done directly from custodian to custodian.
Inherited IRA Rules. Another big rule change comes directly from the Supreme Court. Prior to last year’s decision, there was some uncertainty and disagreement as to whether an inherited IRA was subject to federal protection from creditors (as may be the case in a bankruptcy proceeding) in the same way that employer-sponsored retirement plans were. The court’s decision clarified that unless the IRA is bequeathed to a spouse, an inherited IRA would in fact be subject to the claims of creditors.
These new and clarified tax rules will not affect every owner of a self-directed IRA, but it’s important to gain at least a passing familiarity with them so that you can avoid making any decisions with your account that will unintentionally cost you or your heirs money in the years to come.