Is there a wrong way to do an IRA rollover?

By Dan Moisand

IRAs, Roth IRAs, RMDs: There are plenty of rules, make sure you follow them

Dear Dan,

I read your column: I accidentally overfunded my IRA last year - how much trouble am I in? and in it you mentioned an improper rollover. What makes a rollover improper? Doesn't one company just send the funds to another?

Wondering About Rollovers

Dear Wondering,

What you are describing is often called a "direct rollover" or "trustee to trustee transfer." Firm A sends a check to you or Firm B with the check reading something like "Payable to Firm B for the benefit of the Jane Doe IRA." Such direct rollovers are rarely deemed invalid.

When a rollover is deemed invalid, the invalidated amount is taxable. If you are younger than 591/2, an additional 10% penalty can apply.

The three most common causes of rollovers that are deemed improper are ineligibility for a rollover, a violation of the 60-day rules, and a violation of the 12-month rule.

Two times that a rollover is simply not permitted, and that we see frequently, involve Required Minimum Distributions (RMD) and Inherited IRAs.

Read: The Fed rate cut scared me. Where should I invest my $127,000 in savings now?

One cannot rollover an RMD. So, if you get a check from your IRA made payable to you individually before the RMD is satisfied, depositing that check in any IRA or Roth IRA could be deemed an improper rollover.

Once an RMD is satisfied from your IRA, you may distribute additional amounts and roll them over into an IRA or a Roth IRA in your name. If the rollover of these additional distributions is to an IRA, no taxes will be due. If they are rolled into a Roth IRA, you have executed a conversion, and taxes will be due. Regardless of the type of account, the rollover must be completed within 60 days.

Getting money sent to you from one IRA and then depositing those funds back into an IRA in the 60-day rollover window is often referred to as a "traditional rollover," an "indirect rollover," a "60-day rollover," or just plain "rollover." Funds from the first IRA that make it into the receiving IRA in that 60-day period are not taxed. Any amounts that don't make it, including tax withholdings, are taxable and if the IRA owner is under 59 1/2, subject to a 10% penalty.

The 60-day rollover window begins the day you receive the check from the issuer, not the date on the check, the date in the postmark on the envelope with which the check was mailed to you, or the date you cash the check. The 60-day rollover window ends when the funds are deposited. All days count so if the window ends on a weekend or holiday, you will want to make the deposit the business day before that.

The 60-day option does not exist with Inherited IRAs. Nonspouse beneficiaries are not permitted to roll those funds into their own IRA like a spousal beneficiary may do. Nonspouse inheritors can only take the funds as a distribution or directly into an Inherited IRA for their benefit. Inherited IRAs cannot use the 60-day rollover method and cannot be converted to a Roth account.

You can only do a 60-day rollover once in a 12-month period. Like the 60-day window, the 12-month period begins the day you receive the check from the issuer.

While only one 60-day rollover is allowed in a 12-month period, there are no limits to the frequency of the direct rollovers described at the start of this response. Further, direct rollovers from one traditional IRA to another traditional IRA do not generate 1099-Rs so there is nothing to do or worry about when filing your tax return. As a result, the direct rollover method is preferred.

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-Dan Moisand

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09-22-24 0844ET

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