Have you thought about rolling your traditional IRA from one financial institution to another? Maybe you're looking for higher returns, more investment selections, or better customer service. Below is an overview of IRA rollover rules and tips on how to avoid common rollover mistakes.
- If you leave a job or start a new one, you may need to roll over your retirement account to an IRA.
- Rollovers must be completed within 60 days of receiving funds from the old account, and only one rollover is allowed annually.
- Direct transfers of retirement account funds to a new qualified account is an efficient transfer method and avoids common rollover mistakes.
The 60-Day Rule
“IRA rules can be tricky and some have even changed over the years, so you need to be careful, otherwise you could pay income tax and penalties," says Dan Stewart, CFA®, president of Revere Asset Management Inc., in Dallas, Texas.
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," says Marguerita M. Cheng, CFP®, CEO of Blue Ocean Global Wealth, Gaithersburg, MD.
If you do not complete the rollover within the time allowed or do not receive a waiver or extension from the Internal Revenue Service the amount will be treated as ordinary income by the IRS.
You must include the amount as income on your tax return, and any taxable amounts will be taxed at your current ordinary income tax rate. Plus, if you were not 59½ years old when the distribution occurred, you face a 10% penalty on the withdrawal.
One-Year Waiting Rule
You cannot make a second tax-free rollover of an IRA for one year after you distribute assets from your IRA and roll over any part of that amount.
This limit on IRA-to-IRA rollovers does not 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 does not apply to rollovers from traditional IRAs to Roth IRAs, or Roth conversions.
Common IRA Rollover Mistakes
RMDs Ineligible for Rollover
You are allowed to make tax-free rollovers from your IRAs at any age, but if you cannot roll over your annual required minimum distribution (RMD) because it would be considered an excess contribution.
As of January 2023, with the passage of the SECURE 2.0 Act of 2022, you are required to take an RMD each year when you reach the age of 73. Subtract the current year’s RMD amount from your IRA before implementing a rollover. The RMD age will increase to 75 beginning in 2033.
Same Property Rule
Your rollover from one IRA to another IRA must consist of the same property. This means you cannot take cash distributions from your IRA, purchase other assets with the cash, then roll over those assets into a new or the same IRA. Should this occur, the IRS would consider the cash distribution from the IRA as ordinary income.
If an entrepreneur, aged 57, wants to roll over a portion of her IRA from one financial institution to another but uses some of the IRA assets to buy stock. She purchases the shares and moves the remaining cash into a new IRA. Then, she deposits the shares into the same IRA account, hoping to receive tax-deferred treatment.
The IRS deems the portion of the distribution used to purchase the stock as a cash distribution taxable as ordinary income. Because she is younger than 59½, the IRS would also assess a 10% penalty on the taxable portion of the amount used to purchase the stocks.
Transferring Your IRA
If you move your IRA from one financial institution to another and do not need to use the funds, you should consider using the transfer method instead of a rollover. A transfer is non-reportable and is allowed at any time during any period.
“A transfer removes the withdrawal process of the rollover, which ensures the assets go directly to their end account, and investors remove the risk associated with the 60-day rule,” says Mark Hebner, founder, and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of The 12-Step Recovery Program for Active Investors.
“In my opinion, a direct transfer is the most optimal solution to move funds from one IRA to another,” says Carlos Dias Jr., founder and managing partner of Dias Wealth LLC in Lake Mary, Fla.
What Retirement Plans Can I Rollover Into My Traditional IRA?
You can rollover funds from the following accounts to a traditional IRA:
- A traditional IRA you inherit from your deceased spouse
- A qualified plan
- A tax-sheltered annuity plan
- A government deferred compensation plan (section 457 plan)
What Is a Direct Rollover?
If you want to avoid the withholding and the associated reporting requirements, a direct rollover, sometimes referred to as a trustee-to-trustee transfer, is a method that should be used to effectuate your rollover from your qualified plan, 403(b) plan, or governmental 457 plan account. Plus, there is no 60-day window to worry about.
What If I Forget to Take My Full RMD on My Traditional IRA?
Failure to take an RMD from a traditional IRA levies an excise tax of 25% of the shortfall. If the error is corrected promptly, the excise tax is reduced from 25% to 10%. This provision begins in the taxable years after December 31, 2022, under the SECURE 2.0 Act of 2022.
The Bottom Line
When changing jobs, employees often choose to roll over their IRA accounts to the new employer. Traditional IRAs can also be moved from one financial institution to another for higher returns or more investment options. However, many rules apply to rollovers, including the 60-day rule, RMD requirements, and same property rules.