IRA Rollover Rules Have Big Consequences

Why It’s Important to Know Your IRA Rollover Rules

According to a February 2024 ICI Report, IRAs continue to be a large component of retirement savings representing 35% of total investment assets. A rollover IRA allows investors to transfer their assets from one type of account (e.g., an employee-sponsored plan) to a traditional IRA. This affords a wider range of investment options without losing tax-deferred status. Interestingly, the same ICI Report notes that 62% of IRA owners participate in rollovers. Given the popularity of both IRAs and IRA rollovers, it is important to understand the rollover rules so that you do not inadvertently lose tax-deferred status.

4 Tips for Completing IRA Rollovers the Right Way

Limit to One Indirect Rollover a Year

According to the IRS investors may make only one IRA rollover per year, regardless of how many IRAs they may have. If this rule is not followed, investors will pay a 10% early withdrawal tax on the amount included in gross income.

Importantly, this rule does not apply to:

• Rollovers from traditional IRAs to Roth IRAs (conversions)
• Trustee-to-trustee transfers to another IRA
• IRA-to-plan rollovers and vice versa
• Plan-to-plan rollovers

With some rule violations, it’s possible for investors to lose their IRA investment status entirely, making the account essentially a taxable distribution.

Weigh the Options: Direct or Indirect Rollover?

You can move IRA money to another IRA directly or indirectly. But what does this mean in regard to the IRA rollover rule?

• A direct rollover allows investors to move their assets from one IRA to another without being touched or ‘cashed out.’ This is also the case for a trustee-to-trustee transfer. The one-per-year rule does not apply to these types of rollovers.
• Indirect transfers require more care and attention, as investors are limited to one indirect rollover per year. An indirect rollover, called a ‘60-day rollover,’ is when investors withdraw their assets or receive a check from their provider. Investors then have 60 days to roll over the money to another IRA (or even back to the same IRA) to avoid a tax penalty. The tax penalty may be waived under certain circumstances.

Remember that Roth IRAs Count, Too

The IRA rollover rule does apply to Roth IRAs, but only when a distribution and consecutive rollover between Roth IRAs is made.

In contrast, Roth conversions receive an exemption from the once-per-year IRA rollover rule. After all, the IRS already taxed the accounts initially. Converting from a traditional IRA to a Roth IRA after a rollover is acceptable.

Consider the Trustee-to-Trustee Method

For retirement-minded investors who don’t want to manage a calendar of rollover events, there may be another option. Under the trustee-to-trustee direct transfer method, an investor can elect to receive a distribution in the form of a check already made payable to the receiving IRA custodian.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Navigating Credit Agreements
2. Trade Finance Basics
3. Nuts & Bolts of Lost Profit Cases

This is an updated version of an article originally published on September 9, 2020. This article was most recently updated by the Financial Poise Editors.]

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