The One-IRA-Rollover-a-Year Rule That Can Turn 'Moving Money Around' Into a Tax Mistake
When tidying up your finances, it’s common to move money around. But when doing so, it’s important to consider tax consequences.
Typically moving money from a traditional individual retirement account (IRA) to another traditional IRA is not a taxable event — though there’s an exception. An indirect IRA-to-IRA rollover can become a taxable event if you don’t pay close attention to the IRS’ rules.
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What the one-rollover-a-year rule says
When you roll money from one account to another, you can typically do this directly or indirectly. A trustee-to-trustee transfer means the money passes directly from one institution to another without you touching the money. An indirect rollover is one in which the distribution is made to you and you have 60 days to deposit the money into the new account.
You can only make one indirect IRA-to-IRA rollover in a 12-month period. The same rule doesn’t apply to trustee-to-trustee transfers.
That 12-month window starts when the distribution is received, not on Jan. 1 of the year that you initiated an indirect rollover. This 12-month window applies across all of your IRA accounts. If you do an indirect IRA rollover between two accounts, you cannot do an indirect IRA rollover between a different set of IRA accounts for the next 12 months.
You can still contribute to an IRA after initiating a rollover. Moving money from one IRA to another does not count toward your contribution limit. The IRS outlines additional rules for rollovers and your options.
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The tax mistake to avoid
A tax mistake can occur when that same person does another indirect rollover within the same 12-month period, even if it is between two completely different IRAs. That second indirect rollover may be treated as a taxable distribution since the person was not eligible to roll it over.
If you are under age 59 ½, you may also face a 10% penalty. The IRS may then treat the funds from the second indirect rollover as an excess contribution, potentially subject to a 6% penalty if not corrected.
The safer way to move IRA money
Trustee-to-trustee transfers tend to come with fewer headaches than indirect rollovers. Your plan administrator or financial institution holding your IRA conducts the rollover for you, and you don’t have to deposit the money within 60 days. You can ask the financial institution or plan administrator how they will confirm that the rollover has been completed.
There is no limit to how many trustee-to-trustee transfers you can do in a given year. The 12-month window is also specifically for transferring money from an IRA to an IRA.