What is a Rollover?
The term rollover is typically used to describe the transfer of funds from a traditional IRA to another traditional IRA or eligible retirement account without suffering tax consequences. This can occur either through a direct transfer between the two accounts, or by check which the custodian of the distributing account writes to the account holder, who then deposits it into another retirement account. If the account holder receives a check, they have 60 days from receipt of distribution in which to place the funds into the receiving retirement account.
Why You Might Rollover Funds
You may have the need to transfer funds from one security into another security, or you may simply have the need to transfer funds between trustees, or you may be consolidating all your traditional IRA’s into one place (for example an IRA with an old employer). Another reason may be a surviving spouse has to rollover a deceased spouse’s IRA to a Trust controlled by the surviving spouse. Or sometimes people simply need cash, and they expect to be able to replace the funds within 60 days–perhaps they need the down payment for a home purchase, but the financing of the down payment will be delayed for 30 days or so.
What Are the Tax Consequences?
Trustee to Trustee transfers are not taxed, since they never enter your hands. However, if it is disbursed to you (into your bank account or via check), then you have the 60 days within which to place the funds into another retirement account. If the transfer between accounts is not made within the 60 day period, the amount will generally be taxed, and it may also be subject to a 10% penalty (e.g., if a $50,000 withdrawal is not placed back into an eligible account, you will pay income tax on the amount plus a $5,000 penalty). However, the IRS may waive the 60-day rollover requirement, and in some cases, there are automatic waivers. If you have violated the 60-day period, contact us at [email protected], and we can advise you of the potential for waiver.
Limit on Rollovers
Only one tax-deferred IRA-to-IRA rollover can be made within a one-year period IF the rollover is accomplished first by distributing funds to the account holder (NOTE: this is within a “one-year” period and not a “calendar year” period). However, there is no limit on direct Trustee-to-Trustee transfers. Many have in the past “leap-frogged” withdrawals from various IRAs to accomplish holding cash for a longer period (e.g., withdrawing $50,000 from IRA 1 and repaying it on the 59th day, withdrawing another $50,000 from IRA 2 on the 60th day and repaying it on the 119th day); AND through December 31, 2014, this is allowed; however, beginning January 1 2015, the IRS says it will treat separate traditional IRAs as ONE IRA for purposes of the rollover rules.
Solutions
If you have questions on IRAs or other tax matters, please feel free to contact E. Daniel Miller, CPA, PC at (888) 734-3933 or [email protected].
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