Tax Planning

Don’t Make This IRA Rollover Mistake

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by Alli Thomas

Jul 18, 2021

IRA rollovers are a popular retirement planning tool, but there are some rules to be aware of so that you don’t make a costly mistake.

In general, you can deposit any amount distributed from a pretax retirement plan or IRA into another IRA within 60 days of receipt without incurring a tax liability. However, there’s a limit to how often you can do this – and it’s not very frequently.

 

The Rolling 12-Month Rule for IRA Rollovers

In 2015, the IRS significantly restricted IRA rollovers, limiting an individual to a single transaction within a rolling 12-month period, regardless of the number of IRAs owned (previously, it was on an IRA-by-IRA basis). This rule aggregates an investor’s IRAs, including SEP, SIMPLE, traditional and Roth IRAs, effectively treating them as a single IRA.

The operative word in this rule is “rolling.” Many investors believe that the 12 months refers to a full calendar year, but it means any consecutive 12-month period. In other words, if you take a distribution from your IRA in September 2021 and roll it over to another IRA in November 2021, you won’t be able to do another IRA rollover until November 2022. If you attempted a second rollover in February 2022, the entire amount would immediately become taxable income.

This limit does not apply to:

 

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Are There Other Penalties?

Yes, you may face other penalties as well, depending on your circumstances!

If you’re under age 59 ½, you’ll pay an early withdrawal penalty of 10% of that second rollover amount. You may also have to pay the 6% excise penalty on any IRA contributions over the annual limit if you don’t correct it in a timely way.

 

Does This Rule Apply to Inherited IRAs?

Yes. If you inherit your spouse’s IRA upon their death and you have already made an IRA rollover within the last rolling 12 months, you must wait until the 12-month period has ended before you can roll the inherited IRA into your own to avoid inadvertently taking a taxable distribution.

 

Can This Limit Be Avoided?

Luckily, there’s an easy solution to these potential IRA rollover pitfalls. If you want to move assets from one IRA to another, don’t request to have the IRA distribution sent to you. Instead, work with the custodians of both IRAs and do a direct rollover. Unless you plan on keeping a portion of your IRA rollover amount (in which case, it would become taxable income for you), there’s no reason to have the IRA rollover check made payable to you! A direct rollover seamlessly moves your IRA from one custodian to another and ensures that you will avoid unwanted tax consequences from the transaction.

You could also help yourself avoid potential IRA rollover problems by having a custom retirement plan designed by a professional financial advisor specifically for your financial situation. Among its many benefits, such a plan will help you proactively optimize your finances. Click here to get started by requesting a no-cost, no-obligation consultation with a member of our nationwide advisor network.

 

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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