Beware the IRA rollover Trap

In a recent article by Ed Slott on the Investornews website, Ed warns of the year end IRA rollover trap. 

A few years ago the IRS installed very strict rules for the transfer of qualified money IRA to IRA transfers.  If you do not follow the rules exactly, you will lose the tax protection of your IRA and your IRA money will become immediately taxable.  If you are under 59 ½ there could also be a 10% penalty.

There are two ways to transfer money between qualified accounts.  You can do a direct Trustee to Trustee transfer or you can do a rollover.

A Trustee to Trustee transfer means that the wire or check is sent directly to the  successor Trustee.  The IRA or Roth IRA funds are never placed in your name, no check is made out to you and no wire every deposits money into your personal accounts. THE MONEY MUST GO DIRECTLY BETWEEN TRUSTEES TO QUALIFY.

To quote Ed Slott “The once-a-year IRA rollover rule only applies to indirect rollovers in which funds are withdrawn personally to be redeposited to another, or the same, IRA within 60 days of when the funds are received. This is what is commonly referred to as a “60-day rollover.”

Withdrawn personally means that the check is made out to the IRA owner personally, as opposed to being transferred directly to another IRA, with the

Under the rule, an indirect rollover from one IRA to another IRA (or from one Roth IRA to another Roth IRA) can only be done one time per year. Here’s the New Year tax trap: That year is not a calendar year. It is a fiscal year. The rollover can only be done once every 365 days. IRA owner never touching the funds.

Most folks I speak to are unaware of this rule.  Those that do understand the rule (even many advisors) believe that it is a calendar year rule i.e. one transfer per calendar rule.  But this would be a fatal mistake.

The rule requires you wait 365 days between indirect rollovers between IRAs or Roth IRAs.

The 401(k)