Beware the Limits on IRA Rollovers

(Image credit: This content is subject to copyright.)

You can tap your IRA and put the money back into an IRA within 60 days without incurring a tax bill. But try doing that a second time within 12 months and Uncle Sam will come calling.

You can only do one 60-day IRA rollover in a 12-month period, regardless of how many IRAs you own. Before 2015, the one-per-12-month rule could be applied to each IRA you owned.

Failing to heed the limited rollover rule triggers some costly consequences. The distribution you intended to put back into the tax shelter will instead become taxable. And you’ll incur tax penalties for excess contributions as long as the disallowed money remains in the IRA.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

One big misunderstanding several IRA owners have had about the change is not realizing that all their IRAs are included, even SEP IRAs and Roth IRAs, says Mark Struthers, founder of Sona Financial, in Chanhassen, Minn. “It is easy to make a mistake,” he says.

Although this rule has been in effect for a while, not everyone is aware of the change nor an easy solution that can mitigate the risk of getting snared by it, says Cheryl Costa, principal with Woodside Wealth Management, in Framingham, Mass. If you need to move IRA money between financial firms, make the switch through a direct trustee-to-trustee transfer. That type of transfer can be done any number of times in a year.

Costa says she advises clients to always do a trustee-to-trustee rollover. Some custodians still send a check to the account holder for forwarding, she says. If that happens, be sure the check is made out to the custodian “for benefit of” the account holder.

10 Things Boomers Must Know About RMDs From IRAs

For IRA owners who invest in certificates of deposit, there’s another solution: Use brokered CDs instead of direct CDs. In chasing the best CD interest rates, you could run afoul of this IRA rule limiting rollovers if you move CD money from bank to bank yourself more than once in 12 months. But because you can keep multiple brokered CDs in one brokerage account, you can eliminate a potential tax headache while scoring the best available interest rate on your cash in an IRA.

Mary Kane is a financial writer and editor who has specialized in covering fringe financial services, such as payday loans and prepaid debit cards. She has written or edited for Reuters, the Washington Post, BillMoyers.com, MSNBC, Scripps Media Center, and more. She also was an Alicia Patterson Fellow, focusing on consumer finance and financial literacy, and a national correspondent for Newhouse Newspapers in Washington, DC. She covered the subprime mortgage crisis for the pathbreaking online site The Washington Independent, and later served as its editor. She is a two-time winner of the Excellence in Financial Journalism Awards sponsored by the New York State Society of Certified Public Accountants. She also is an adjunct professor at Johns Hopkins University, where she teaches a course on journalism and publishing in the digital age. She came to Kiplinger in March 2017.