Why is it so important to know how the once-per-year rollover rule works? The trouble with the once-per-year rollover rule is the kind of trouble that no one wants! An IRA owner who violates this rule will incur serious tax consequences.
One Rollover a Year for an IRA owner
If an IRA owner elects not to do a direct transfer but instead chooses to move her money by a rollover, there will usually be no escaping the once-per-year rollover rule. The rule says that an IRA owner cannot roll over an IRA distribution received within 12 months of a prior IRA distribution rolled over.
Traditional and Roth IRAs are combined for purposes of the once-per-year rule. A distribution and subsequent rollover between your Roth IRAs will prevent another rollover of a traditional IRA received within one year from receipt of the Roth. The bottom line is that only one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover may be done if the distribution is received within 12 months of each other.
Fatal Error
A mistake with the once-per-year rollover rule can result in the loss of your retirement savings. It is a fatal error with no remedy. If an IRA owner takes a distribution with the intent of rolling it over and discovers that she is ineligible to roll over the funds due to the rule, that distribution will be taxable. She will no longer have an IRA and will likely have a tax bill instead. The distribution will also be subject to the 10% early distribution penalty if the IRA owner is under age 59 ½.
If she deposits the funds anyway, she will have an excess IRA contribution, including all the penalties and headaches that go with it. What about the IRS? The IRS will not be able to grant relief because, by law, the IRS has no authority to waive this rule. The self-certification procedures, which allow for alleviation when the 60-day rollover deadline is missed, do not apply to violations of the once-per-year rollover rule. A private letter ruling (PLR) request won’t work either.
Direct Transfers Are the Way to Go
Why chance it? A suitable place to start is by avoiding 60-day day rollovers whenever possible. If there is no 60-day rollover, then there is no once-per-year rollover rule to worry about. How can you move your retirement funds? The best advice is to directly transfer the funds from one retirement account to another instead. You can do as many transfers between IRAs annually as you want. There are no limitations.
By Sarah Brenner, JD
Director of Retirement Education
Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 2022, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Content posted in Ed Slott’s IRA Corner was developed and produced by Ed Slott & Co. to provide information on a topic that may be of interest. Ed Slott and Ed Slott & Co. are not affiliated with Ethos Capital Management, Inc. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
