Traditional and Roth IRAs both have two ways of transferring money between IRA accounts: directly and indirectly. New interpretations of IRA rules affect indirect transfers, those made with distributions to account holders that are rolled over to another IRA within 60 days. Provisions of the new interpretation include:
- Only one indirect transfer per year is now permitted. This is true for all IRAs – traditional and Roth – and is only one per account holder total, not one indirect transfer per IRA. If a second rollover is made within 12 months, the transfer will trigger a taxable distribution plus 10% penalty for account holders under age 59 ½.
- A second indirect transfer within a 12-month period may also be an excess contribution, according to the IRS. The funds are an ineligible rollover and subject to a 6% penalty for each year the money remains in the account, on top of the taxes from the distribution (traditional IRA) and 10% penalty.
- Roth conversions are exempt from the one-per-year rule. So, a person can do an indirect transfer, and also convert a traditional IRA to a Roth IRA.
- A rollover is considered direct if the check is made out to a financial institution instead of the account holder. When the check is made to the account holder, the distribution is indirect.
In the past, some people have ‘borrowed’ from their IRA by using funds and replacing the funds within 60 days. This will no longer be a viable option unless it is carefully managed for one time per 12 months. The new interpretation of the rule begins now, in 2015, for rollovers that occur this year and going forward. Previous multiple indirect transfers are not subject to penalty.
There are no changes to the direct transfer method, also called a trustee-to-trustee transfer. Account holders can move money directly from IRA to IRA as many times as desired with no penalty or consequence as long as they don’t take possession of the funds at any time.
Bottom line: Whenever possible, move IRA funds directly with a trustee-to-trustee transfer. Avoid complications whenever possible. Talk with a Salmon Sims Thomas tax advisor if you have questions about your specific situation.