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IRA Rollovers

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Retirement is coming, and as a smart saver, you have been preparing for it. After all your years of planning, be sure to continue making the correct decisions now to assure a secure retirement later. As the time draws near, it is important to understand the rules regarding rollovers, transfers and aggregations of required minimum distributions (RMDs). Review this information to help clarify any questions you may have. You may wish to speak with a competent tax advisor before completing any rollover transaction.

What is a Rollover?

A rollover is a tax-free way to move IRA funds between IRAs of the same type (Traditional to Traditional, Roth to Roth, etc.). If a rollover is not handled properly, it is no longer tax-free, and the individual may be subject to severe tax consequences, including taxation of the rollover amount and IRS penalties.

A rollover is a two-part process. The IRA holder who is completing a rollover is actually taking a distribution from the IRA, and the financial organization issues a check payable to the IRA holder. The distributing institution reports this transaction on IRS Form 1099R, Distributions from Pension, Annuities or Profit Sharing Plans, IRAs, Insurance Contracts, etc. The distribution is generally reported on the 1099R with either a Code 1 or a Code 7. Code 1 is used if the IRA holder is under age 59 ½, and Code 7 is used if the individual is over age 59 ½.

Upon completing the rollover deposit back into an IRA, the receiving financial organization reports the rollover on Form 5498, IRA Contribution Information. In addition, even though a rollover is not a taxable event, the IRA holder must always report a rollover on their tax return. 

IRA Rules: 60-Day and 12-Month

There are two criteria the IRA holder must be made aware of when completing a rollover – the 60-day rule and the 12-month rule. If an individual takes a distribution from an IRA, those funds must be rolled back into an IRA within 60 days from the date the distribution is received. If the 60th day falls on a Saturday, Sunday or holiday, the rollover must be completed on the business day before. If the 60 days have passed, the funds generally become ineligible for rollover.

As of January 1, 2015, for any IRA withdrawal made on or after this date, an IRA owner may complete only one IRA rollover in any 12-month period, regardless of whether they have IRAs at more than one institution and whether or not they have multiple types of IRAs (Traditional, Roth or SIMPLE).  The customer may not complete a rollover from each IRA type or complete a rollover from more than one institution.

Example: If a withdrawal is made from a Roth IRA in the amount of $2,000 on January 4, 2016 and those funds are rolled back into a Roth IRA on March 4, 2016 (within the 60 days allowed) the one rollover per year rule has been met. No additional withdrawals that are intended to be rolled over may be made from any IRA type at the same institution or any other institution until January 4, 2017. 

Aggregation of RMDS

When IRA holders who are age 70 ½ or older have IRAs at multiple institutions, IRS regulations allow the IRA holder to calculate the amount of each of their required minimum distributions (RMDs). You may aggregate the RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA plan.

Rollover vs. Transfer

The terms “Transfer” and “Rollover” are not interchangeable.  They have very separate and distinct definitions when determining how to move funds from one IRA to another. Whether or not the transaction is processed as a rollover or transfer also determines whether or not the RMDs for customers age 70 ½ or older can be taken at the time of the distribution or if the RMD can be taken later in the year or aggregated.

For a rollover, the individual initiates the withdrawal from an IRA, takes receipt of those funds, then deposits the funds back into an IRA, either at the original institution or with a new organization. The rollover must be completed within 60 days of receiving the distribution, can only be done once per IRA plan, and must not include any mandatory distribution amounts.

EXAMPLE: 
IRA Distribution - $10,000
RMD Amount - $1,000
Amount Eligible for Rollover - $9,000

Although an IRA customer over age 70 ½ may aggregate their RMDs, the funds from the rollover cannot be included in the aggregation. The RMD from the distributing IRA of the rollover funds must be fulfilled prior to making the rollover deposit

In the case of a transfer, the direct movement of IRA funds is from one IRA Custodian/Trustee to another. The individual does not take receipt of the funds. Normally a check is payable to the new institution for the benefit of the IRA holder. The RMD may be included in the transfer and taken later in the year. The aggregation option is available to the IRA holder, if they transfer their IRAs between institutions during any year in which they are age 70 ½ or older.


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