What Is A Tax-Free IRA Rollover?

by JD Miller on June 20, 2011

JD Miller CPA
The Trusted Financial Planner

A tax-free IRA rollover is a rollover that meets both the 60-day rollover rule and the so called “once-per-year” rollover rule.

You may be familiar with the 60-day rollover rule for IRAs. But do you know about the “once-per-year” IRA rollover rule for IRA-to-IRA (or Roth IRA-to-Roth IRA) rollovers?

Few people, and few advisors, know about the “once-per-year” IRA rollover rule for IRA-to-IRA (or Roth IRA-to-Roth IRA) rollovers. Those who do often overlook it, unintentionally, with financially devastating consequences to you.

Protect yourself. Get the help of a CPA or other tax advisor who understands these rollover rules.

What is the 60 day rollover rule?

A rollover occurs when you withdraw money from your IRA (or Roth IRA) in a check payable to you and you deposit it to another IRA (or Roth IRA) within 60 days, as opposed to you doing a direct rollover.

A direct rollover is a direct transfer or a trustee-to-trustee transfer where your money goes directly to another IRA.

You never have to worry about either the 60-day rule or the “once-per-year” IRA rollover rule when you use a direct rollover to make your IRA rollovers.

For more information about a “direct rollover”, click here ==>.

When money comes out of an IRA payable to the account owner, but not to a beneficiary, it must go back into one of your IRAs within 60 days. Otherwise, the transaction will be treated as a distribution, subject to income tax and perhaps a 10% early withdrawal penalty.

The reason for the distinction between “the account owner” and “a beneficiary” above is that a beneficiary is a person who has inherited an IRA. They aren’t an account owner. It isn’t their IRA.

A beneficiary can never rollover an inherited IRA to an IRA or a Roth IRA. A beneficiary is one who has inherited an IRA.

Once a beneficiary has taken a distribution, it cannot be put back into an IRA. It immediately becomes subject to income tax. That’s the bad news.

The good news is that a beneficiary withdrawal is never subject to a 10% early withdrawal penalty.

Protect yourself. Get the help of a CPA or other tax advisor who understands these rollover rules.

What is the “once-per- year” rollover rule?

After you complete a rollover from one of your IRA accounts, you may not make another rollover from that same account during the following year (365 days).

In addition, you can’t make rollovers from the IRA that received your rollover during the 365 day period following the date that you deposited your rollover money into it.

Any distribution from either of those IRAs during that 365 day period is a taxable distribution. You cannot roll it over to another IRA.

However, you can move money from either of these IRAs during that 365 day period by using a “trustee-to-trustee transfer”. For more information about a “trustee-to-trustee transfer”, click here ==>.

Note that this is not a calendar year, but 365 days. This is the “once-per-year” IRA rollover rule.

Note: The IRS does not have the authority to waive the 12-month (once-per-year) rule, no matter how compelling your circumstances might be. Protect yourself. Get the help of a CPA or other tax advisor who understands these rollover rules.

Here’s an example of the 60-day rule and the “once-per-year” rollover rule.

First, the 60-day rule

On December 11, 2010, you withdraw $10,000 from one of your IRAs, IRA A. This is your first withdrawal from IRA A for 2010 and you didn’t do a rollover from this IRA in the 365 days preceding December 11, 2010. You also didn’t deposit any rollover money to this IRA, IRA A, after December 11, 2009, 365 days earlier. The $10,000 check was payable to you.

On January 5th of 2011, you deposit the check to another of your IRAs, IRA B. This is the first deposit to IRA B of any funds withdrawn and rolled over from any of your other IRAs since January 5, 2010, 365 days before the date of the deposit.

This is a qualified rollover from your IRA A to your IRA B because you met both the 60 day rollover rule and you didn’t violate the 365 day rollover rule.

You deposited the check to IRA B within 60 days from the date of the check. That meets the 60 day rollover rule.

Now, the “once-per-year” IRA rollover rule

Rollover withdrawals are not allowed from any IRA from which an IRA rollover has been withdrawn from or deposited to during the 365 days following the date of a previous IRA rollover. This has nothing to do with the calendar year. This is the “once-per-year” IRA rollover rule. The IRA rollover year begins with the date of the IRA rollover withdrawal and ends 365 days later.

You meet the 365 day rollover rule in the above example because you didn’t deposit another rollover check to IRA B after January 5, 2010.

You can’t do another rollover to or from IRA A until December 12, 2011, 366 days after the distribution from this IRA.

You can’t do another rollover to or from IRA B until January 6, 2012, 366 days after the date of the deposit of the rollover to IRA B from IRA A.

Not understanding the once-per-year IRA rollover rule can cost you big time. Rollovers that don’t meet the once-per-year IRA rollover rule are ineligible rollovers.

Ineligible rollovers are taxable distributions. Where you thought you were making a tax-deferred rollover to your IRA or your Roth IRA, you now have unexpected taxable income.

These ineligible rollovers could also be subject to the 10% early withdrawal penalty.

An ineligible rollover could also create an excess contribution subject to a 6% penalty.

Note: The IRS does not have the authority to waive the 12-month (once-per-year) rule, no matter how compelling your circumstances might be. Protect yourself. Get the help of a CPA or other tax advisor who understands these rollover rules.

Click here to ask your questions.

Please share with others.

Leave a Comment

Previous post:

Next post: