One of the biggest mistakes IRA owners make is rolling over their IRA from one custodian to another. With interest rates so low, investors are trying to squeeze every fraction of a percent that they can. “When their CD comes due, they go to their bank and say, ‘The bank down the block is paying more. Give me my money.’” They take the IRA proceeds, walk down the street and invest them in a six-month CD inside a new IRA at Bank No.2. Then, says CPA and IRA expert Barry Picker “Six months later they take the money out and move it again. You can’t do that!”
As it states on Page 23 in IRS Publication 590:
“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same one-year period, from the IRA into which you make the tax-free rollover.”
What that means is that over a full 12 months, both IRAs that assets are coming out of and going into cannot accept or delivery rollovers. If you try to do a second rollover in either account, your IRA is in big trouble. Moreover, if you do not correct the mistake, you have made an “excess contributions”. You will owe taxes on the amount and face a 6% penalty on the an\mount for as long as it remains in the account.
A way around this is what’s known as a trustee-to-trustee transfer. Don’t cash out your assets (cash, stocks, bonds, etc.) but instead electronically transfer them from the old custodian to the new one.
One last caveat to the rollover is that only the registered owner of the IRA can rollover funds to a new custodian. So if you have an inherited IRA, you are never the owner of the IRA, you are the beneficiary. “There is no rollover provision for an inherited IRA!” emphasizes Picker. “The only way to move the account is with a trustee-to-trustee transfer where you never get your grubby hands on the cash.”