The IRS Won’t “Roll Over” on this mistake!

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I recently had a client situation that brought to light a critically important new tax rule that I thought would be important to share. This simple rule has a huge impact for investors who execute a very common retirement plan strategy, and can have an extremely negative tax consequence for even a minor mistake.

One of the most common retirement plan transactions is known as a “60 Day IRA – to – IRA Rollover”. Basically, this transaction allows an investor to directly withdraw funds from an IRA account without tax, and then re-deposit those funds into another IRA account within 60 days. Provided the funds are replaced within 60 days, there is no tax to be paid on this transaction.

60 Day rollovers can be done for a variety of reasons, such as to move assets from one IRA account to another, or to cash in an annuity or CD from one IRA and move the proceeds to another IRA. Some investors may even use this rule to take a temporary 60 day loan from their IRA, to buy a new home or take advantage of a short term opportunity. As long as the funds are replaced back into an IRA within 60 days the IRS does not restrict the use of the funds in the meantime.

However, the critical rule is that only ONE such rollover is allowed to be transacted in any one year period, and the IRS has begun using a much stricter interpretation of that limit in the last year. In the past, the IRS deemed that each IRA account an investor owns would be allowed to take one separate 60 day rollover in a year. However, under the new interpretation, the rule applies in the aggregate to all IRA’s and Roth IRA’s the investor may own. Importantly, the definition of “One Year” is also 365 days, not one calendar year.

The tax consequences can be very steep for violating this rule. Any investor who attempts to execute a 2nd rollover transaction within a 365 day period will be subject to treatment of the 2nd rollover as a taxable distribution, meaning they will have to pay income tax on the distributed amount, plus a 10% penalty tax if under age 59.5. In addition, it is possible that they will have to pay a 6% “excess contribution” tax on the money they put back in to their IRA in error. Making matters worse, the IRS will not “rollover” on this issue – the IRS does not have any provision to allow relief from this rule. Ignorance of the rule is no defense.

The bottom line: 60 Day Rollovers can be a useful transaction for moving money between IRA’s, or even for taking a short term loan from your IRA. However, under no circumstances should you do this transaction more than once in a 365 day period.

Better yet: NEVER make any transaction with your IRA or other retirement plan account unless you seek competent advice from a qualified advisor!


About the Author:

Erik is one of the co-founders of Concentus Wealth Advisors and currently serves as the Chief Executive Officer of the firm. With over 25 years of industry experience, Erik guides the firm’s overall strategy. After graduating from Amherst College in 1991, Erik spent a year working with Rittenhouse Capital Management, before joining Gerald in 1992. Erik currently holds his general securities registrations and insurance licenses, as well as CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant designations. In addition to his formal designations, Erik has appeared on CNBC’s Worldwide Exchange, Fox News’ America’s News HQ, Live Well’s Mary on Money, CN8’s Money Matters Today and The Real Estate Connection. In 2012, Erik was one of thirteen advisors named to Main Line Today’s Top Financial Advisors list. Erik lives in Bryn Mawr, PA with his wife and three children. He serves on the boards of the Philadelphia Chapter of the Salvation Army, Acting Without Boundaries (serving young people with disabilities) and The Holy Child School at Rosemont. In addition, he is on the financial advisory board of the Sisters of St. Francis in Media, PA.

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