What a Year Means When it Comes to Your IRA Rollover | Ed Slott and Company, LLC

What a Year Means When it Comes to Your IRA Rollover

By Sarah Brenner, JD
IRA Analyst
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The once-per-year rollover rule says that you can only roll over one IRA distribution from all of your IRAs (both traditional and Roth) in a one-year period. This is a tricky rule and many taxpayers have run into trouble with it. One area that can be very confusing is determining exactly what the definition of “year” is.

Here is how it works. You can only rollover IRA funds once every 12 months. The 12-month period is a full 12 months. It is 365 days. A new calendar year does not mean you have a fresh start for purposes of the once-per-year rollover rule.

Example: Rose took a distribution from her IRA on August 10. She rolled over the funds within 60 days. In January of the following year she took a distribution from another IRA. This distribution may not be rolled over because less than 12 months have passed since the date of the last distribution she rolled over. The fact that the distribution was taken in a new calendar year does matter.

When does the year start? It does not start with the date the funds are distributed to you. It does not start with the date of your rollover. The 12 months actually begin on the date you receive the funds from your IRA. If the funds are directly deposited to your account, you start counting on the date the funds are in your account. If a check is mailed to you, you start counting on the date you receive the check.

Example: Louis receives a distribution from his IRA on September 1 of Year 1 which he rolls over on October 3 of Year 1. Louis may not take another distribution that will be eligible for rollover until September 1 of Year 2.

Misunderstanding what a year is for purposes of the rule and winding up with a violation can have serious tax consequences for you. If your distribution cannot be rolled over, it will likely be taxable to you and possibly subject to the 10% penalty as well, depending on your age. Your IRA funds will be gone. If you mistakenly deposit funds that are not rollover eligible to an IRA, you can have an excess IRA contribution complete with all the headaches and penalties that go along with that.

Use Transfers Instead of Rollovers

To avoid problems with the once-per-year rollover rule, whenever possible you should move your IRA funds by doing trustee-to-trustee transfers instead of 60-day rollovers. With a transfer, the funds go directly from one IRA custodian to another. The funds are never available to you so all the complicated rollover rules do not apply. Transfers are not limited in frequency. This means you will never have to worry about exactly what the definition of “year” is.

 

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