What is the 'Same Property Rule'

The same property rule requires that a rollover transaction between retirement accounts retain the same asset type. Violations of the rule trigger premature withdrawal penalties.

BREAKING DOWN 'Same Property Rule'

The same property rule applies to rollover transactions between retirement accounts, in which an investor transfers assets from one eligible retirement plan to another. Any time an investor takes a distribution from a retirement plan, the IRS must determine how to treat that income for tax purposes. Rollover transactions typically avoid tax consequences because any distributions get reinvested in a qualified retirement account. When investors choose to execute a rollover themselves, the IRS generally gives them 60 days to do so without tax consequences.

The 60-day requirement simply allows an investor enough time to set up a new retirement account and execute a transfer of holdings. To ensure that timing does not create a loophole during which an investor could use the retirement fund distributions as a short-term loan, the IRS places a further requirement on rollover transfers that requires investors to use the same property they receive from the old account to fund the new account. In other words, an investor who receives a cash distribution from a retirement account must make a cash contribution to the new retirement account. If an investor withdraws stock assets from a retirement account, the investor must reinvest the same stocks in the new account to avoid taxation.

Example of the Same Property Rule

Premature withdrawal penalties exist to encourage investors to hold money in retirement accounts until they reach at least age 59.5. Suppose Paul, a 45-year-old investor, decided to use the rollover window as a loophole to execute a set of trades with his IRA. He takes a distribution from the account and uses it to purchase a hot stock, which ends up appreciating nicely. After a month, he places a portion of the shares equal to the value of his distribution into a new IRA in order to defer taxes. Because he has taken a distribution and made an equal investment within 60 days, the transaction has the appearance of a rollover. Since he received a cash distribution and funded the new IRA with stock, however, the same property rule applies, making the distribution subject to income tax plus early withdrawal penalties.

Alternative Rollover Options

Investors can avoid issues with the same property rule by keeping rollover transactions as simple as possible. Direct rollovers and trustee-to-trustee transfers allow investors to move money from one retirement account to another without taking a distribution. These methods avoid the 60-day rule and the same property rule by keeping the retirement holdings under the control of financial institutions at all times.

  1. Rollover

    A rollover may entail a number of actions, most popularly the ...
  2. IRA Rollover

    An IRA rollover is a transfer of funds from a retirement account ...
  3. Direct Rollover

    A direct rollover is a distribution of eligible assets from one ...
  4. Direct Transfer

    A direct transfer is a transfer of assets from one type of tax-deferred ...
  5. Automatic Rollover

    Automatic rollover refers to the transfer of account assets into ...
  6. Retirement Money Market Account

    A retirement money market account is a money market account that ...
Related Articles
  1. Retirement

    Wealth-Building IRA Rollovers

    Rollovers allow your tax-deferred retirement assets to grow, even when the world around you is changing.
  2. Investing

    IRS Cuts Some Savers a Break on IRA/401(k) Rollovers

    The Internal Revenue Service is providing some relief to certain taxpayers who may have missed the 60-day window allowed for IRA and 401(k) rollovers.
  3. Financial Advisor

    Best Ways to Roll Over Your 401(k)

    When you leave a job, you have some decisions to make about what to do with your 401(k). Here are your options.
  4. Retirement

    7 Common Retirement Investment Questions Answered

    Having a working knowledge of retirement plans and investments can help take the guesswork out of funding your retirement.
  5. Retirement

    Avoid Tax Consequences With a Direct 401(k) Rollover

    There are several options for your 401(k) plan when you leave an employer, two of which are the direct and indirect rollover.
  6. Financial Advisor

    3 Costly Retirement Account Mistakes to Avoid

    These are the most common pitfalls investors should try to avoid when it comes to retirement accounts.
  7. Retirement

    5 Ways to Lose Your Retirement Nest Egg

    These common mistakes can put your savings at risk. Find out how to avoid them.
  8. Retirement

    Planning for Retirement the R.I.T.E. Way

    With proper financial and tax planning, you’ll be better positioned to achieve your retirement goal.
Trading Center