IRA Rollovers

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General

An IRA rollover is the tax free movement of retirement funds from one retirement account to another retirement account. A key characteristic of a rollover is that the account owner gains control of the retirement assets. This means that if they so choose they can spend the funds. For the purpose of the rollover rules a qualified plan is an employer plan such as a 401-K plan, 403-B plan, 457 plan, or other pension plan. For purposes of the rollover rules an IRA is not a qualified plan.

Rollovers are always two-step transactions:

• First, there must be a reportable distribution paid from a qualified retirement plan, a traditional account, or a Roth account.

• Second, there must be a redeposit of the distribution into another qualified retirement plan, a traditional account, or a Roth account.

• Distributions which are not rolled-over must be reported as income in the year the distribution is received.

• If non-cash assets, such as shares of stock, are withdrawn from a self-directed account, the same assets must be rolled-over.

• If non-cash assets are withdrawn from a qualified retirement plan, the assets can be sold and the cash rolled into a traditional account.

Types of Rollovers

• A distribution from a traditional IRA can be rolled into another traditional IRA.

• A distribution from a qualified retirement plan can be rolled into a traditional account.

• A distribution from a traditional account can be rolled into a qualified retirement plan.

• A distribution from one Roth IRA can be rolled into another Roth IRA.

• A distribution from a Roth designated account that is part of a 401-K plan or 403-B plan can be rolled into a Roth individual account or into another Roth designated account.

• The HEART Act allows the tax-free rollover of any military death gratuity and servicemembers' group life insurance payments(SGLI) to a survivor's Roth IRA or to an education savings account (ESA). This provision applies to deaths occurring on or after October 7, 2001. The rollover must be completed within one year after receipt of the payment. For deaths occurring prior to enactment the payment must be rolled over within one year of June 17, 2008. • The financial bail-out bill added a real jewel. Individuals receiving a settlement form the Exxon-Valdez litigation are allowed to roll up to $100,000 into a traditional IRA tax free.

The One Year Restriction

• Account owners are allowed to rollover one distribution, per plan agreement, per year. An individual who owns one agreement and invests in several investments (CDs, shares of stock, etc.) owns ONE IRA.

• The one rollover per year rule is not based on calendar years. One year is 365 days, beginning with the day after a distribution is received.

• The following transactions do not count as a rollover for the purpose of the one rollover in 12 months restriction:

1. A rollover of a distribution from a qualified retirement plan into a traditional account.

2. The conversion of a traditional account into a Roth account.

3. The rollover of a first home distribution back into a traditional account or into a Roth account not later than 120 days after the distribution was taken.

4. Recharacterizations.

5. A Roth designated account rolled into a Roth individual retirement account.

6. The rollover of a military death gratuity into a Roth IRA or into an Education Savings Account.

7. The rollover of an Exxon-Valdez settlement into a traditional IRA.

The 60 Day Restriction

• The rollover transaction must be completed by the 60th day following receipt of the distribution.

• The rollover of a first home distribution must be completed by the 120th day following receipt of the distribution.

• The IRS is allowed to waive the 60 day rule if failing to grant a waiver would be against equity or good conscience.

• Congress didn’t define “equity or good conscience,” but they did give some examples. These are: casualty, disaster, and other events beyond the control of an individual. The other events mentioned are: combat, presidentially declared disasters, errors committed by financial institutions, death, disability, hospitalization, incarceration, postal errors, and not cashing checks which represent qualified rollover distributions.

• The IRS also ruled that errors committed by financial institutions receive automatic waivers as long as the accountholder complied with all of the rollover rules and the error is corrected by the end of one year from the date the 60 day period began.

• All other waivers require the payment of a filing fee and compliance with IRS regulations relating to obtaining private letter rulings.

Death Distributions and Rollovers

• Spouse beneficiaries can rollover death distributions paid from traditional and Roth accounts.

• Non spouse beneficiaries cannot rollover distributions paid from any individual retirement account; however, they are allowed to roll over distributions paid from qualified plans,such as 401-K plans to beneficiary accounts only. The IRS requires the use of a direct rollover to complete this transaction. Distributions paid directly to the beneficiary cannot be rolled over. This rule is effective for distributions made after December 31, 2006.


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