Additional Clarification on Rollovers and Transfers

I’m compelled to provide an additional update to the posts I’ve provided in the past in the article Avoiding the One IRA Rollover Per Year Problem and its follow-up Understanding the One-Rollover-Per-Year Rule.  This is primarily to provide clarity to a portion of this rule that I personally was unclear on when the articles were originally written.

The rule is that you are restricted to one IRA rollover in a 12-month period.  So let’s define a few things for the purpose of this discussion:

Rollover – this is when you move money from one IRA to another, first taking possession of the funds prior to depositing the funds into the new (or the same old) account.  You have 60 days to complete this process.  At the end of the tax year you’ll receive a 1099R from the original custodian, with a distribution code of 1 or 7 (this form is important to the rule).

Transfer – Also known as a trustee-to-trustee transfer or a direct rollover, in this case you do not take possession of the funds, they are transferred directly from one IRA to another.  Another possible way this could occur if you receive a check from the old custodian made out to the new custodian.  Typically this sort of movement of funds does not generate a 1099R at the end of the year, as you’ve not actually made a distribution – no taxable event has occurred.

12 months – this really means a full year, 365 days in a normal year, 366 days in a leap year.

The Rule

Now that we have our definitions, here is the rule:

You are restricted to only one Rollover for each IRA account, either receiving or distributing during a full 12 months from the date of distribution.

Transfers are not influenced by this rule. You are allowed to make as many transfers between IRAs as you like, uninhibited by the rule.

An example is in order:  You have an IRA at Mutual Fund Company A, and you take a rollover distribution, and you deposit the money into your IRA account at Brokerage B.  You are restricted in that you cannot make any other rollovers into or out of these two IRAs.

If you have other IRAs, the rule does not apply to those – only IRAs that have been subject to rollover (as defined above) into or out of them within the previous 12 months.

Roth IRA Conversions and Recharacterizations do not apply to this rule either – these are different sorts of distributions, and can be taxable events, but are not subject to this rule’s restriction.

Lastly, the rule does not apply to rollovers into or out of Qualified Retirement Plans (QRPs) such as a 401(k).  You are free to do as many rollovers into or out of an IRA to/from QRPs with no time restrictions.

Hopefully this has helped to fully clarify the rule.


IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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3 Comments

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  • Lori, there are a lot of options available for a low-cost IRA. Many of the no-load mutual fund companies have no fee IRAs (or very low fee, as in $10), as do many of the discount brokerages.

    I can’t make specific recommendations here, but if you’d like to contact me directly (see my profile to get to my website) I would be happy to talk this over with you.

    jb

  • Hello Jim,

    I’ve got an Index 500 Annuity with Ameriprise and and eligible to move the money, withdraw or renew. I don’t want to renew and I don’t want to pay interest. I’m going to be 56 years old this year. I’m thinking of rolling this over to an IRA, but not sure how to go about this. I understand that if I rollover, the money never touches my hand and thus will not pay taxes.

    Do you have a referral for a no fee based IRA?

    Thanks in advance for your insight.

    Lori

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