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Let’s take a look at three important rules if you're contemplating an IRA rollover:
1. The distribution must be recontributed within 60 days or it is taxed. It's also hit with a 10% early distribution penalty for people under age 59 1/2. IRS offers relief if you deposit the withdrawn funds to an IRA after the 60-day period. You can self-certify that you qualify for a waiver of the 60-day rule in certain cases. The late rollover must be for one of 12 reasons and completed within 30 days after the specific reason for failing to do it timely in the first place ceases.
2. You must roll over the same property that you received from the IRA. For example, if you took a cash distribution, then cash must be deposited in a rollover. If the payout was 100 shares of Apple stock, those same shares must be put back.
3. Don’t violate the one-rollover-every-12-months rule. This rule applies on an aggregate basis to all your IRAs, not on an IRA-by-IRA basis. IRA owners with multiple accounts can make unlimited trustee-to-trustee transfers between IRAs in a 12-month period because such direct transfers aren’t rollovers. Ditto if the IRA owner is given a check payable to the new IRA for his or her benefit.
IRA rollover rules: A case study
Here is a case in which an IRA owner violated all three rollover rules. He had a custodial IRA governed by a custodial agreement. His IRA held an interest in a hedge fund, among other assets. Pursuant to the agreement, the IRA owner was required to annually provide to the financial institution that held his IRA the fair market value of the hedge fund interest.
He didn’t do this in 2015, so the bank, per the agreement, had the IRA distribute the hedge fund interest to him. The bank issued him a 1099-R reporting the payout. Over a year later, he liquidated his hedge fund interest and recontributed the proceeds to another IRA with a different custodian in three transfers. He reported this series of events on his 2015 Form 1040 as a nontaxable rollover. The Tax Court disagreed, ruling the distribution was taxable due to these violations:
- The same property wasn’t rolled over. The distribution to the IRA owner was that of a hedge fund interest, and he contributed cash to the second IRA.
- The attempted rollover was late. He received the hedge fund interest in Nov. 2015 and contributed the cash to the second IRA in 2017. This is past the 60-day deadline.
- There was more than one rollover in a 12-month period. The transaction involved three separate cash contributions into the second IRA over six months.
(Est. of Caan, 161 TC No. 6).
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
