Careful With That IRA Rollover!

If there’s an IRA rollover in your future, you’ll want to pay special attention to updated rules from the IRS that went into effect last year. Those rules make the process more restrictive, and it’s easy to make an expensive mistake.

First, let’s clarify that we’re talking about “60-day rollovers”, where a distribution is withdrawn from an IRA (including Roth, SEP, or SIMPLE) with the proceeds going to the account owner. The funds are then rolled back into another IRA account within 60 days, which is called an indirect rollover. For those rollovers, the new IRS rule is that you can only do one 60-day rollover per year (once every 365 days).

This does not apply to every rollover. Direct transfers, where an IRA moves directly from one account to another, are exempt from the rule. Also exempt are rollover checks made payable to a custodian and not the account holder, i.e. “Charles Schwab FBO John Smith”. Transfers to or from other plans (like 401k or 403b) and Roth conversions are not included either.

It’s important to note that the one 60-day rollover per year applies to allIRA’s in aggregate. For example, you could not receive rollover checks for an IRA and a SEP-IRA account and deposit both checks into new accounts within 60 days. One of those deposits would be ineligible and completely taxable, and subject to a 10% early distribution penalty if under 59 ½. Ed Slott, a CPA in NY and an expert on IRA distributions, calls this a “fatal error…it cannot be fixed.” The ineligible deposit would also get hit with a 6% excess IRA contribution penalty if it was not removed in time.

In practice, we have seen clients do 60-day rollovers when there is short-term need for cash, like purchasing a new home before their previous house sells. In the past it was possible to take separate distributions from multiple IRA accounts, each with its own 60-day window. Some would take a distribution from their IRA and Roth IRA, and then deposit the money back within 60 days. The new rule severely limits this practice, and the IRS is being very strict about enforcing it.

If you have specific questions about an IRA rollover and how this rule affects you, please let us know.

Russell W. Hall, CFP®