When it comes to retirement planning, there are few IRA rules that can be more devastating to your retirement savings than the once per year IRA rollover rule.
Here’s how it works: When you take money out of your IRA and the check is made payable to you personally, you have 60 days to deposit that check into another IRA to avoid those funds being taxed as ordinary income. The once per year IRA rollover rule complicates this further by only allowing you to do this once per full 12-month period.
Here’s an example, Susan took a distribution from her IRA on April 22nd. She rolled over the funds within 60 days. In January of the following year, she took a distribution from another IRA. This distribution may not be rolled over because less than 12 months have passed since the date of the last distribution she rolled over. The fact that the distribution was taken in a new calendar year does not matter. The 12-month period starts on the day the funds were received by the account owner.
Here is another example. Sean receives a distribution from his IRA on April 1st of year one and then he rolls over the distribution on May 4th of year one. Sean may not take another distribution that will be eligible for a rollover until April 2nd of year two, a full 12-month period after he received the first check.
To avoid making a fatal error with the once per year IRA rollover rule, I recommend a direct trustee-to-trustee transfer of funds when possible. Some custodians might charge $25 to $40 to have a check made payable to the new IRA custodian, but it’s worth it, so that you don’t have to worry about running in to a costly tax mistake. For a check to qualify for a direct transfer, it must be made payable to the new IRA custodian.
Even spouses can have an issue in the event of the death of a loved one. For example, Alice is the beneficiary of both her husband’s traditional IRA and Roth IRA. She would like to do a spousal rollover of both inherited IRAs. If Alice receives distributions from the inherited traditional IRA on September 9th of year one and does a 60-day rollover of the funds, she cannot be eligible for a rollover distribution from the Roth IRA until September 10th of year two. However, Alice can directly transfer the funds from both the inherited IRA’s to her own IRA’s at any time because the once per year rollover rule does not apply to direct transfers.
All IRA owners should educate themselves on the difference between a direct transfer and a rollover. It is also important to note which rollovers do not count towards the once per year IRA rollover rule. If a once per year IRA rollover rule is violated, a fatal and irreversible error to your retirement savings can occur.
Financial adviser, retirement wealth strategist, co-founder of Strategy Financial Group and author of “Climbing the Retirement Mountain,” Calvin Goetz is an IAR (Investment Adviser Representative) who holds the Series 65 securities license, is life and health insurance licensed in the state of Arizona and is a member of Ed Slott’s Elite IRA Advisor Group™ and the National Association of Insurance and Financial Advisors (NAIFA). For more information, visit StrategyFinancialGroup.com.