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More On the One-Rollover-Per-Year Rule

Beethoven,_Ludwig_van_32/19/2014 update: This rule has been updated to allow only one rollover for ALL IRAs per year. See the article The One-Rollover-Per-Year Rule: Revised for more information.

This particular rule is one that can really cause you a lot of problems – and there’s no reason to run into problems with it, if you plan ahead and do things right.

One of the big reasons why this rule can cause so much heartache is because there is no way, procedurally, for the IRS to grant an exception, no matter what the circumstances are.  For example, in the 60-day-rollover rule, often the IRS may be in a position to grant an exception, especially if something awful happened to make you miss the deadline.  This sort of exception is not even a consideration for the One-Rollover-Per-Year rule. It just can’t be done.

Key Features of the One-Rollover-Per-Year Rule

You are allowed to roll over funds from one IRA or Qualified Retirement Plan to another, that’s a given… but you’re limited in how often you can do this, if you use the 60-day-rollover.  A 60-day or indirect rollover is when you take distribution from an IRA in the form of a check (or a deposit into a non-IRA account), and then within 60 days you deposit the funds into another IRA (or back into the same IRA).

The other way to rollover funds between IRAs, the preferred method, is called a trustee-to-trustee or direct transfer, where you don’t actually receive a check – the transfer is done between the first IRA and the second IRA, with no one else handling the money in between.  There is no limit to how many trustee-to-trustee rollovers you can do per year.

FYI, the IRS doesn’t even refer to these direct transfers as rollovers, generally speaking – they call them trustee-to-trustee transfers.  The “R” word is generally reserved for the indirect, 60-day type.

So – if you use an indirect rollover to move funds from one IRA to another, you now have limited yourself, with regard to those two IRAs.  You cannot rollover money from either IRA to any other IRA for 12 months – actually 365 days, 366 in leap years.

How about an example to ‘splain this a little better?


Situation 1: You have 3 IRAs: IRA A, IRA B, and IRA C.  There is $100,000 in each account. You wish to move half of the money from IRA A into IRA B.  If you take a withdrawal from IRA A of $50,000 and receive a check for it, you can then deposit the check into IRA B within 60 days, and the rollover is complete.

At this point, you cannot rollover any the remaining $50,000 in IRA A into IRA B or IRA C for 12 months.  You furthermore cannot rollover any of the current $150,000 that is now in IRA B into IRA A or IRA C for 12 months.  What you could do is rollover any amount you wish from IRA C into either IRA A or IRA B –  as long as IRA C hasn’t been involved in an indirect rollover within 12 months.

Situation 2: Same situation as above, except that you do a direct, trustee-to-trustee rollover of $50,000 from IRA A to IRA B.  You are not limited at this point for making any other move with the funds in any of your IRAs.  You could rollover the same $50,000 back into IRA A from IRA B if you wanted using either method, but the indirect rollover would put you back into the limit mode described above.  You are free to make any rollovers you wish at this stage, since you used the trustee-to-trustee transfer.

Situation 3: Same facts as in Situation 1 above, except that you change your mind about the rollover a week after you requested the check from IRA A, and you deposit it back into IRA A (without ever depositing into IRA B).  Regardless of the fact that you’re back where you started, this action is considered a rollover.  This has now limited your ability to successfully rollover any amount from IRA A for a period of 12 months.  The other IRAs are unaffected.

Situation 4: This one will be more complex, showing what might happen if you aren’t paying attention.  Same starting facts as the others. You do an indirect rollover of $50,000 from IRA A to IRA B on September 1, 2010.  So far so good.  But then, you decide you want to rollover the remaining $50,000 from IRA A into IRA C, and you do this on December 1, 2010.  Then in January of 2011, you figure out that what you’d really like is to rollover all of the funds from IRA C into IRA A instead, so you take the distribution of $150,000 from IRA C and deposit into your IRA A account within 60 days.

What is going to happen?  Well, if all of those things happened and none of the custodians stopped you, you would have to pay tax on a distribution of $50,000 (plus any growth on that amount) from IRA A in 2010.

Since the rollover of $50,000 from IRA A to IRA C was within the 12 month period, this would be considered a disallowed rollover and therefore a taxable distribution.  Since you pulled the money out before taxes were due, there is no additional consequence for your 2010 actions.  If you had waited until after April 18, 2011 you might have had to pay an additional 6% excess contribution tax on the $50,000 disallowed rollover, since this would be considered a regular contribution to IRA C.

But part of the rollover from IRA C to IRA A, the amount less than the disallowed excess contribution and any associated growth, would be allowed as a completed rollover.  Remember the prohibition is on rollovers from the involved accounts, and since IRA C had not been involved in a valid rollover within 12 months (since the rollover from IRA A had been disallowed), this amount is a valid rollover.  You’d still have to pull out the $50,000 (plus growth) from IRA A to avoid excess contribution tax.

In all of the situations above where the distribution became taxable, there could also be the 10% early distribution penalty applied unless one of the exceptions is met.


So – what’s the lesson here?  Never, ever, ever do a 60-day rollover unless there is some mitigating circumstance that requires it.  And if you have to do the indirect 60-day rollover, make sure that you mind your p’s and q’s with the accounts involved, so that you don’t get hung up on the one-rollover-per-year rule.  Often, the IRA custodian will step in and explain the prohibition to you, but not always, and they’re not responsible for your actions.  If you do this and they let you get away with it, the entire tax bill is yours and yours alone.

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  1. HarryNo Gravatar says:

    What about one to many? Say take a $100,000 withdrawal from IRA A, and then within 60 days put $40,000 into IRA B and $60,000 into IRA C. Is that one rollover or two?

    1. jblankenshipNo Gravatar says:

      It’s one rollover for each IRA – one FROM IRA A, one TO each of IRA B and IRA C. Each of these IRAs are now out of the game for 12 months (regarding rollovers).