When is a Rollover not a Rollover?

The IRS will let you take money from an IRA, hold onto the funds for 60 days, and
put it into another IRA without paying any tax or penalty on the transaction. If you don’t
complete the rollover within the 60-day window, the withdrawal becomes a taxable
event. Plus if you haven’t reached age 59½, you could face a 10% penalty. Fairly simple
rule to follow, right? Well, not exactly, since there are a few lesser-known details that if
ignored, could cost some IRA owners or beneficiaries a lot of money.

Investors have been known to run afoul of the “same property” rule, which is within
the IRS rollover regulations. This law states that a rollover from one IRA or qualified
retirement plan to another IRA can only consist of the same property. For instance, you
cannot take a cash payment from a 401(k), buy stocks, and then roll the stocks over to
your IRA.

If you did that, the IRS would consider the cash distribution from the 401(k) income
subject to taxes at the current ordinary income rate. Plus you might have to pay any
applicable penalties. Instead, for the above example, you would have to deposit cash in
the IRA in order for the transaction to be classified as a tax-free rollover.

Another potential problem can surface for IRA beneficiaries.

Only spouses can rollover an inherited IRA into their own IRA. But they are not under
any obligation to do so. It can be done anytime, which allows flexibility for a survivor.
The surviving spouse can move the funds in two ways:

• Withdraw the deceased’s IRA and deposit in her IRA within 60 days or
• Directly move the funds via a trustee-to-trustee transfer

Non-spouse beneficiaries including trusts cannot do IRA rollovers. Therefore, they
can’t use the 60-day rollover rule. And this is where they can get into trouble. For example, suppose that your son is your IRA beneficiary. After your death, he decides to rollover the money to his own IRA. So he receives a check from the IRA trustee with the intention of depositing it in his IRA within 60 days. Shortly after getting the money, he receives a Form 1099-R from the IRA trustee notifying him of a taxable distribution. He tries to get the transaction reversed but cannot and is now forced to use 35% of his inheritance to pay the income taxes because of the error.

I always recommend investors consult with their own qualified tax and financial advisors prior to making any investment decisions.

For help in transferring or rolling over money from your retirement plan or IRA,
please contact us. If you would like to meet either in person or by telephone (or simply want to receive a copy of my "Income Planning Guide"), please use the CONTACT US link and let me know.

I look forward to meeting you!