Don't get Tripped up by IRA rollover rules
You may want to move your IRA from where it’s at to another firm. In doing so, you’ll use a procedure called a “rollover.” It can get confusing, because there are two types of rollovers.
The first method is where your IRA money goes directly from your current custodian (the place where your IRA is held and sometimes called a “trustee”) to the new one. This is called a “direct rollover,” “direct transfer,” or “trustee-to-trustee transfer,” and is the preferred method for transferring IRA assets.
The second type of rollover is where the money comes out of your current IRA to you. It doesn’t have all the fancy names the other method does, but is sometimes referred to as a “60-day rollover because you have 60 days from when you take the money out of your IRA to get the money returned to that or another IRA. If you don’t get the money back under the IRA umbrella within that 60-day period, the IRS will consider it a distribution and will tax you on it. If you’re under age 59-1/2 you’ll also owe a 10% penalty.
Most people are aware of this 60-day rule. Sometimes, they even take advantage of it, using the money for a temporary purpose during the 60 days. This can be dangerous since what you think is a temporary need might end up lasting more than a couple of months.
But what a lot of folks forget about is what’s often called the “once-per-year” rule. This rule says that if you did a 60-day rollover back on September 30, 2010, you have to wait until next October, not just next year, before you can do another 60-day rollover from that same account. You also cannot do a 60-day rollover from the account that received the first rollover for that same 12- month period.
Violate this annual rule and the money from the second and subsequent rollovers will instead be deemed distributions and you’ll owe taxes and maybe a penalty on it. In addition, since you put money into an IRA that you weren’t supposed to, you can also be penalized for making an excess IRA contribution for that year.
Both the 60-day rule and the once-per-year rule are two good reasons to do a direct rollover from your current to your future IRA custodian. That’s because neither the 60-day or once-per-year rules apply to a rollover that goes directly from one trustee to another. You could move your IRA every week if you wanted to without the IRS caring in the least.
Want to learn more? You can find Publication 550, Individual Retirement Arrangements (IRAs) at the IRS website, www.irs.gov.
This article was published under the title "Don't get tripped up by IRA rollover regulations"
in the WichitaFalls Times Record Newson December 5, 2010.
Return to Home Contact Us Sign up for our e-Newsletter