Only One Per 12-month Period
Beginning in 2015, the IRS implemented a new rule regarding IRA rollovers. This rule changes how IRA rollovers are treated for tax purposes in certain instances. According to this new rule, “you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.” (www.irs.gov/retirement-plans/ira-one-rollover-per-year-rule). For example, if you have 3 separate IRA accounts and decide to take some money out of each of these accounts and then “roll” this money into a new 4th IRA account within 60 days, you will have accomplished 3 different rollovers within a 12-month period and thus run afoul of the new rule. The consequences of executing more than one rollover in a 12-month period generally will include having to pay income tax on the amounts that were improperly rolled over and may also include a 10% early withdrawal penalty if you are under age 59 ½. Additionally, if you neglect to remove the ineligible rollover amount from your IRA account you may also get hit with a 6% excess IRA contribution penalty.
It is important to note, however, that this “one rollover per 12-month period” rule only applies to certain types of rollovers. More specifically, it applies to what is commonly known as an indirect 60-day rollover. For example, let’s say you decide to take $100,000 from your traditional IRA account on June 1, 2016 and you receive these funds as a check made out directly to you. Then, you proceed to open a second IRA and on July 1, 2016 deposit this $100,000 check into your new IRA. This is considered an indirect 60-day rollover. So long as you have completed your indirect rollover within the allowable 60-day window and have not completed any other indirect 60-day rollovers in the 12-month period immediately preceding June 1, 2016, you will have successfully completed this rollover. However, you will also be precluded from conducting another indirect 60-day rollover for a subsequent 12-month period.
It is equally important to note there are many other types of IRA “rollovers” that are not limited by the “one rollover per 12-month period rule.” Indeed, the term IRA rollover often is broadly used to describe many different types of transactions whereby assets move from one tax-sheltered retirement account to another.
More specifically, this rule does not apply to:
• Rollovers from an employer-sponsored retirement plan to an IRA; and
• Rollovers from one IRA account to another whereby the assets transfer directly from one IRA trustee to another
As a general rule of thumb, if you rollover IRA assets to another IRA account or assets from your employer-sponsored retirement plan or other qualified retirement plan to an IRA and the assets all transfer directly via the custodians/trustees then these rollovers are not subject to this rule. However, if you receive a distribution from your IRA in the form of a check made out directly to you and you redeposit these funds into your IRA within 60 days then you will be subject to this “one rollover per 12-month period” rule.
You may wonder why someone would take rollover money from their IRA and have it come directly to them rather than allow it to move seamlessly between accounts via the IRA trustees. This situation arises more than you would think especially when someone needs to temporarily “borrow” money from their IRA and intends to return it within 60 days. This need can occur, for example, when someone needs a bridge loan to cover a house down payment while they are still waiting for their house sale proceeds to arrive. In such a case, you can take money from your IRA, use it to make the down payment, and then return it to your IRA or place it in another IRA, so long as 60 days have not passed and you have not already had another indirect rollover in the preceding 12 months. If you are in this situation, please contact your financial advisor here at BLB&B Advisors as we can help you navigate the process of a 60-day indirect rollover from your IRA. We can also help you avoid triggering unexpected tax consequences by, for example, conducting more than one indirect rollover in a 12 month period.
In the instance of the bridge loan example above, let’s assume you will need to temporarily remove money from both of your IRA accounts to complete your home purchase. The better way to proceed would be to do a direct IRA trustee-to-IRA trustee rollover from your 2 IRA accounts to a third IRA account. Neither of these rollovers would be considered indirect 60-day rollovers and thus the rule would not apply. Then, you can take your one indirect 60-day rollover from this third IRA. Assuming you return the funds to this third IRA within 60 days and you have not completed any other indirect 60-day rollover in the preceding 12-month period, you should not trigger any adverse tax consequences or violate this rule.
As you can see, this rule is more complicated than it first appears. Also, everyone’s financial and tax situation is unique. If you are considering an indirect 60-day rollover, you need to do your homework first as it is difficult, if not impossible, to undo any missteps after the fact. We strongly suggest you contact your financial advisor here at BLB&B Advisors as well as your tax advisor before proceeding in order to obtain customized advice from people who are knowledgeable about your circumstances. Please note, however, that our firm does not offer tax or legal advice.