By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement Planning

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Nothing can be scarier than receiving an IRS notice in the mail, especially if the letter suggests that you owe additional taxes, interest, or penalties.  When a botched IRA rollover is the cause, that mistake can lead to bigger problems with the loss of tax deferral on your retirement savings.  To avoid mistakes with your IRA rollovers, here are some important details you need to know:

Direct Rollovers, Indirect Rollovers, and Transfers Are All Different Ways to Move Retirement Accounts – But Each Has Different Rules and Tax Impacts

  • Direct Rollovers – A direct rollover occurs when you authorize your current or former employer to move your 401(k) or other company-provided retirement plan directly into another retirement plan or IRA. A direct rollover is typically used once you become eligible to receive a plan distribution, such as when you retire or no longer work for your employer.  Direct rollovers are reportable on your income tax return, but they generally are not taxable.
  • Indirect Rollovers – An indirect rollover occurs when you make yourself the middle man to a rollover transaction. A distribution is paid from the plan or IRA to you and you are responsible for rolling it over to another retirement plan or IRA.  Indirect rollovers are reportable on your income tax return.  If you do not complete the rollover properly or on time it can result in tax liabilities, penalties and loss of tax deferral.  More details are discussed below.
  • Transfers – A transfer occurs when you authorize the financial institution that holds your retirement account to transfer it directly into the same type of account at another financial institution (IRA to IRA, Roth IRA to Roth IRA, etc.) You can move your retirement accounts between financial institutions as often as you like with this type of trustee-to-trustee transfer.  Transfers are not reported on your income tax return and are not taxable.

Indirect Rollovers Must Be Completed Within 60 Calendar Days

Retirement accounts are tax-deferred so you generally must pay income taxes when you receive a distribution of retirement plan or IRA assets.  You are given 60 calendar days to roll over a distribution you receive into a plan or IRA to continue tax deferral and avoid payment of income taxes.  If you miss the 60-day deadline, generally you must include the distribution in your taxable income and, if you are younger than age 59 ½, pay a 10% early withdrawal penalty.  If you are unable to complete the rollover due to circumstances beyond your control, such as a financial institution error or a death or serious illness in the family, the IRS may waive the 60-day rollover requirement.  The IRS has a list of Frequently Asked Questions on their website.  There are also instructions on when the 60-day rollover deadline can be automatically extended and what is required for you to self-certify if you qualify.

IRA-to-IRA Rollovers are Limited to One Rollover Every 12 Months; Plan-to-IRA Rollovers are Not

In addition to the 60-day rule, indirect rollovers between IRA accounts are also limited to one rollover transaction in a 12-month period.  This rule applies across all IRAs you own – traditional IRAs, Roth IRAs, SEP IRAs or SIMPLE IRAs.  For example, if you have both a traditional and Roth IRA, and you took a distribution July 1, 2018 from your traditional IRA and you rolled it back in within 60 days, any subsequent distribution taken from your traditional or Roth IRA before July 1, 2019 will not be eligible for rollover.  It is not a one-rollover-per-IRA-per-year rule, it is a one-rollover-per-person-per-year rule.

Rollovers from a 401(k), pension, profit sharing or other employer-provided ERISA retirement plan to an IRA are not limited to one per year and neither are rollovers(conversions) of traditional IRAs to Roth IRAs.  Also, unlike the 60-day rollover requirement, the IRS does not provide a waiver if you made more than one IRA-to-IRA rollover in a year. If excess contributions, income taxes, early distribution penalties or lost tax deferral isn’t scary enough, there are also typically amended income tax returns to file and interest penalties for late payment of taxes when you or the IRS discover the mistake in a later tax year.

You Cannot Roll Over Required Minimum Distributions (RMDs)

Another rollover blunder can happen if you roll over your required minimum distributions (RMDs).  RMDs generally begin when you reach the age of 70 ½.  If you inherited a retirement account and you are not the surviving spouse, RMDs generally begin no later than December 31 of the year following the year of the original account owner’s death.  Or, if you are still working beyond age 70 ½, you may be able to delay the start of your required minimum distributions from your current employer’s retirement plan until you retire or separate from service.  Regardless of when you are required to take them, you cannot roll over your RMDs to another retirement plan or IRA, or convert them to a Roth IRA.

Inherited IRAs From Anyone Other Than Your Spouse Cannot Be Rolled Over or Combined with Other IRAs You Own

Non-spouse beneficiaries that inherit IRAs or other retirement accounts need to be especially careful not to make costly rollover mistakes.  With an inherited IRA, there is no 60-day rollover available. The only way to move from one financial institution to another is via a direct rollover from a retirement plan to an inherited IRA or a trustee-to-trustee transfer from one inherited IRA to another.  Inherited IRAs have special account titles that identify both the name of the decedent and the beneficiary.  If you receive a check paid to you from a loved one’s retirement account after their death and you are not the surviving spouse, you will not be able to roll over the distribution.

With so many ways for rollover blunders to happen, it’s important to get the help you need before you act so you don’t end up with a scary financial mistake. If you find yourself in a rollover situation, contact a Benjamin F. Edwards financial advisor for help.

Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.