Three IRA Rollover Rules You Must Know | Ed Slott and Company, LLC

Three IRA Rollover Rules You Must Know

By Sarah Brenner, IRA Analyst
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When it comes to investing your IRAs, you are in the driver’s seat. If an investment is no longer working for you and another opportunity better fits your retirement savings strategy, you may want to move your IRA funds. You are probably aware that some investments may limit your ability to do this or impose penalties, but often overlooked are the serious consequences that will occur if you run afoul of the IRA rules when trying to make your move. Before you decide to take a distribution from your IRA, you will want to understand three very important rules that apply to rollovers.

  1. No More than One Rollover in a Year

One critical rollover rule has tightened its belt in the past couple of years. You are now allowed to roll over only one distribution from any of your IRAs (both traditional and Roth) in a 365-day period. So, if you have already taken a distribution within the past 365 days and rolled it over to an IRA of the same type, you can’t take another distribution and roll it over as well. This is an important rule to keep in mind before taking a distribution because once the distribution is paid out, it is too late. You can’t put it back in to an IRA. You are likely to face taxes and possibly penalties.

  1. No Rolling Over an RMD

If you are age 70 ½ or over in 2016 and have a Traditional IRA, you will have an RMD for the year. This RMD may not be rolled over to another IRA. Also, the rules say that “the first money out” of your IRA is considered your RMD. Bottom line, if you are age 70 ½ or over this year, you must take your RMD before rolling over any other funds from your IRA. If your RMD is deposited to an IRA, you will have an excess contribution in that IRA which will be subject to a 6% penalty for each year it remains there. For more information on RMDs, check out our Definitive Guide to RMDs for Baby Boomers.

  1. No Later than 60 Days

Consider your timeframe before you take a distribution from an IRA. Remember, that you have 60 days to roll over an IRA distribution. Can you get the funds back into an IRA in time to make this important deadline? Sometimes IRA owners look to their IRA as a source for a short-term loan. This can be risky if things don’t work out as planned and the funds are not available by the end of the 60-day period. Also, unexpected things happen. What if you, or a family member, get sick? A good plan of action is to not “borrow” from your IRA and don’t wait until the last minute to roll over your distribution. IRS relief for missing the 60-day period is expensive. A private letter ruling requesting an extension comes with a high price tag, and that does not include professional fees for preparation of the request. There is also no guarantee that IRS will grant you the additional time to complete the rollover. Missing the deadline is a costly mistake.

Consider a Transfer Instead

That's a lot of rules to remember. You may be thinking that there must be an easier way. There is, and it is called a trustee-to-trustee transfer. In fact, the three rules we just discussed do not apply at all if you go with a transfer instead of a rollover! So, how do you transfer your IRA? It is critical that the transaction is done properly. In a transfer the funds are directly payable from you current IRA custodian to your new IRA custodian. You don’t receive the funds like you do in a rollover. If you want to move your IRA funds, discuss the possibility of a transfer instead of a rollover with your financial advisor before taking a distribution. Your advisor can help with the transfer process and you will avoid all the pitfalls that come with rollovers.

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