IRA rules have never been simple, and they’ve gotten more complex as time as has gone by. Making a mistake can be expensive, with income tax and penalties potentially consuming a large part of the IRA you worked so hard to build. Be careful, and work with an experienced advisor.
Is it time for you to roll your traditional IRA from one financial institution to another? This often happens at retirement and causes many costly mistakes. This useful article from Investopedia, “Common IRA Rollover Mistakes,” explains the basic rules and what to do to avoid creating a rollover nightmare.
The 60-Day Rule. After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. That’s 60 days, not two months. If you don’t complete the rollover within the time allowed or don’t get a waiver or extension of the 60-day period from the IRS, the amount will be treated as ordinary income. You’ll have to include the amount as income on your tax return, and any taxable amounts will be taxed at your current, ordinary income tax rate. In addition, if you weren’t 59½ years old when the distribution occurred, you'll have a 10% penalty on the withdrawal.
One-Year Waiting Rule. For one year after you distribute assets from your IRA and roll over any part of that amount, you can’t make another tax-free rollover of any IRA. This doesn’t apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b) or 457(b) account within a year. This one-year limit also doesn’t apply to rollovers from Traditional IRAs to Roth IRAs (“Roth conversions”).
Let’s look at some common IRA rollover mistakes:
Your RMDs Aren’t Eligible for Rollover. You’re allowed to make tax-free rollovers from your IRAs at any age. However, if you’re 70½, or older, you can’t roll over your annual required minimum distribution (RMD), since it would be considered an excess contribution. If you’re required to take an RMD each year, be certain to remove the current year’s RMD amount from your IRA before starting the rollover.
Same Property Rule. Your rollover from one IRA to another IRA must be with the same property. You can’t take cash distributions from your IRA, purchase other assets with the cash, then roll over those assets into a new (or the same) IRA. If you do, the IRS would consider the cash distribution from the IRA as ordinary income.
You can roll over funds from any of your own traditional IRAs. You can also roll over funds to your traditional IRA from a traditional IRA you inherit from your deceased spouse, a qualified plan, a tax-sheltered annuity plan, or a government deferred-compensation plan (section 457 plan).
If the rollover eligible amounts from qualified plans, 403(b) plans, or governmental 457 plans are paid to you rather than being processed as a direct rollover to an eligible retirement plan, the payor must withhold 20% of the amount distributed to you. You’ll get credit for the taxes that were withheld, but if you decide to roll over the total distribution, you’ll need to make up the 20% out of pocket. If you want to avoid the withholding and the reporting requirements, a direct rollover should be used to effectuate your rollover from your qualified plan, 403(b) plan, or governmental 457 plan account. A direct rollover is reportable, but not taxable. There’s also no 60-day window. Ask your plan administrator and IRA custodian about their documentation and operational requirements for processing a direct rollover on your behalf.
It may be possible for you to move funds in the other way: taking a distribution from a traditional IRA and rolling it into a qualified plan. However, here’s the thing: your employer is not required to accept the rollovers. Talk with your plan’s administrator before moving assets out of your IRA. You should also speak with your CPA. You want to be sure that any funds you rollover from an IRA into a qualified plan are acceptable to the IRA. You may also want to speak with your estate planning attorney to ensure that these financial moves are aligned with your overall estate plan.
Please note the IRA must be held in your individual name. Beneficiaries should be reviewed and updated regularly. All beneficiaries will receive the IRA at your death.
Contact our office at 718-238-6960 to schedule an appointment to discuss your estate plan.
Reference: Investopedia (March 29, 2018) “Common IRA Rollover Mistakes”