More Clarification on Rollovers and Transfers

Photo credit: diedoe

I’m compelled to provide an additional update to the posts I’ve provided in the past in the article Running Afoul of One Rollover Per Year Rule and its follow-up More on the One-Rollover-Per-Year Rule. This is primarily to provide clarity to a portion of this rule that I personally was unclear on when the articles were originally written.

The rule is that you are restricted to one IRA rollover in a 12-month period. So let’s define a few things for the purpose of this discussion:

Rollover – this is when you move money from one IRA to another, first taking possession of the funds prior to depositing the funds into the new (or the same old) IRA account. You have 60 days to complete this process. At the end of the tax year you’ll receive a 1099R from the original custodian, with a distribution code of 1 or 7 (this form is important to the rule).

Transfer – Also known as a trustee-to-trustee transfer or a direct rollover, in this case you do not take possession of the funds, they are transferred directly from one IRA to another. Another possible way this could occur if you receive a check from the old custodian made out to the new custodian. Typically this sort of movement of funds does not generate a 1099R at the end of the year, as you’ve not actually made a distribution – no taxable event has occurred.

12 months – this really means a full year, 365 days in a normal year, 366 days in a leap year.

The Rule

Now that we have our definitions, here is the rule:

You are restricted to only one Rollover for ALL IRA accounts that you own, either receiving or distributing during a full 12 months from the date of the first distribution.

Transfers are not influenced by this rule. You are allowed to make as many transfers between IRAs as you like, uninhibited by the rule.

An example is in order: You have an IRA at Mutual Fund Company A, and you take a rollover distribution, after which you deposit the money into your IRA account at Brokerage B. You are restricted in that you cannot make any other rollovers into or out of any IRAs that you personally own, except for inherited IRAs, which you are not allowed to make a rollover distribution from anyway (only transfers are allowed). IRAs owned by your spouse are also not limited by actions you’ve made with IRAs that you own.

Roth IRA Conversions and Recharacterizations do not apply to this rule either – these are different sorts of distributions, and can be taxable events, but are not subject to this rule’s restriction.

Lastly, the rule does not apply to rollovers into or out of Qualified Retirement Plans (QRPs) such as a 401(k). You are free to do as many rollovers into or out of an IRA to/from QRPs with no time restrictions. This can often give you an extra advantage if you really need to move money again and a transfer is not in order.

Hopefully this has helped to fully clarify the rule.