Tax Planning Ideas and Tax Updates

Don’t Make This IRA Rollover Mistake

by Alli Thomas

Nov 9, 2022

Account rollovers are a popular retirement planning tool, but there’s one particular rule to be aware of so that you don’t make costly IRA rollover mistakes.

While any amount distributed from a pretax retirement plan or IRA can be deposited into another IRA within 60 days of receipt without incurring a tax liability, there’s a limit to how often you can perform a rollover tax-free.

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.

What is the Penalty for Breaking the Rolling 12-Month Rule?

If you attempt to perform a second rollover during a 12-month period, the entire amount being rolled over would immediately become taxable income.

This limit does not apply to:

You may face other penalties in addition to having to pay additional taxes, depending on your circumstances.

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 Rollover Limit Be Avoided?

Fortunately, if you want to avoid this IRA limit, there’s an easy solution. Instead of requesting that the IRA distribution sent to you, you can work with the custodians of both IRAs to perform 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), you do not need to have a distribution check made payable directly 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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