In the past we’ve talked about the new Once-Per-Year-Rollover-Rule for IRAs. This rule now limits us to one indirect rollover every 12 months no matter how many IRAs you have. If you violate this rule, the IRA in violation may be fully taxed as ordinary income, and possibly incur penalties. The best way to transfer an IRA now is to use a trustee to trustee direct transfer, NOT an indirect rollover. There’s no limit on trustee to trustee transfers.
Today, I’m going to describe some ways that this money can be handled, to make the most of a bad situation, if you’ve violated this rule.
Let’s set this up: say today you do a 60 day indirect rollover of one of your IRAs. Right there you’ve met your limit for the next 12 months. You’re not allowed to do another one for at least 12 months. But because you’re human, you forget and do another one within 12 months.
Now you are in violation. Even if you catch this within 60 days, you cannot put the money back into the IRA. At this point it looks like you are destined to get hit by the IRS for income taxes and if under age 59 ½, penalties on the balance of the IRA in question.
Uh-Oh, Now What?!
Don’t write a check for taxes and penalties yet! There may be two possibilities on how to handle this. BUT, but - these must be done within 60 days of the IRA rollover in question or they won’t work:
- Idea number one: Do You Have an Employer Sponsored Retirement Plan? Like a 401K? If so, then direct the pre-tax IRA money to your employer plan. Rollovers from an IRA to an employer plan are one of the exceptions to this rule. Also, check that your employer plan accepts rollovers from IRAs, most of them DO. If you can pull this off, you might avoid the taxes and penalties that would otherwise be due.
- Idea number two: Roth Conversion – Ok, so you mistakenly did a second traditional IRA distribution within 12 months of each other. Now at this point, that money will be taxed because you went over your limit. You could convert those funds to a Roth IRA. Here’s the trick: If you convert the IRA in violation to a Roth IRA, the IRS allows you to undo the conversion if you want to - like it never happened! That means this money in violation can be put back into the original IRA! This is because the IRS now sees this as a Roth Conversion transaction, not a violation of the once per year rule. Now you just ‘undo’ the conversion and you’re in the clear baby! Cheers!
All these different rules can be confusing, and there’s more to it than what we’ve written. If you need help with any of these matters, call us at 815-455-6453. Thanks for reading!
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.