If you want to move retirement funds from one account to another, you’re allowed one rollover per year. You have 60 days to take money distributed to you from one account and contribute it into another account. If you break the rules, the IRS will level you with major tax consequences. For example, if you take a second distribution that cannot be rolled over, it can be taxed and if you mistakenly rolled it over into another account, you’ll get hit with a 6% excess contribution penalty every year it remains in the new account. Here are some tips to help avoid the pitfalls of the rollover rules.
The easiest way to avoid this jam is never touching the money in the first place. You can perform what is known as a direct rollover or transfer. The assets go from one IRA custodian or plan to another directly. This solves two issues that can result in problems. First, missing the 60-day deadline. If you fail to move the money into a new account within that time frame, the money gets treated like a distribution and you are taxed/penalized based on your age, salary, etc. Secondly, this will avoid mistakenly performing a second rollover in a given year which is a big no-no. Further, these types of transfers are unlimited. You can directly rollover funds as often as you want without fear of penalty.
Next, there are only certain instances when the 60-day rollover rule is in effect. The rule only impacts IRAs and only then when it’s from a traditional IRA to another traditional IRA or from a Roth IRA to another Roth IRA. For example, rollovers from a 401k (or similar plan) to an IRA and vice versa are exempt. In both cases, other accounts are involved other than an IRA.
Moreover, a 60-day IRA to Roth rollover is also exempt. Many people want to utilize the advantages of a Roth plan, so this is one way to open a Roth at any time. It’s still best to do a direct rollover when you want to start funding a Roth however.
It’s important to note that the rule applies on an account by account basis. If you have multiple IRAs, you can perform multiple rollovers, so long as you do not distribute assets from an IRA that has already been involved in a rollover. If you rollover funds from plan 1 to plan 2, you cannot distribute money from either one of those plans for a year. Note that you may contribute to either account from a third IRA.
Check out this article for more info on the 60-day rollover rules. If you have any questions, feel free to contact the tax experts at the IRA Financial Group at 800.472.0646 or visit www.irafinancialgroup.com.