IRA Rollovers and How Timing Restrictions Apply

Tricia Held 300x300.jpg

By Tricia Held, QKA, CISP

Last month, an IRA owner took two different distributions from his Traditional IRA exactly one week apart. Later in the same month, he rolled over one of the distributions back into the same IRA. Now he’s returned within 60 days to roll the second distribution back over into the Traditional IRA. Is this possible?

No. A taxpayer is limited to one IRA distribution eligible for rollover per 12-month period, regardless of the number of IRAs (Traditional, Roth, and SIMPLE IRAs) that the IRA owner may have.

If the previous scenario is not possible, does he have another option to retain the assets of the second distribution in a retirement account instead of treating it as a distribution?

Within 60 days of receiving the second Traditional IRA distribution, the IRA owner may convert the remaining eligible assets to a Roth IRA as an indirect conversion. The one-per-12-month rule for IRA rollovers does not apply to conversions. Although the IRA owner generally must include any pretax assets that are converted to a Roth IRA in taxable income, the taxation outcome may actually be better because a distribution taken before age 59½ that is not rolled over or converted is subject to the 10 percent early distribution penalty tax. Keep in mind that if both were Roth IRA distributions, converting would not be an option for the amount not eligible for rollover.

Another option may be through an indirect rollover to an eligible employer-sponsored retirement plan. Eligible retirement plans include 401(a) and 403(a) qualified retirement plans, 403(b) plans, governmental 457(b) plans and the federal Thrift Savings Plan. The one-per-12-month rule applies only for IRA-to-IRA rollovers. It is important to note, however, that IRA owners may not roll over after-tax (or nondeductible) contributions from an IRA to an employer-sponsored retirement plan.

The employer plan will determine if indirect rollover contributions from a Traditional IRA are permitted. If so, this option would allow an IRA owner to retain the assets within a retirement account and continue to defer taxation until distribution and avoid the 10 percent early distribution penalty tax. 

When does the 12-month period begin for purposes of the one-per-12-month rule?

The 12-month period begins on the day that the IRA owner receives the distribution. For example, if an IRA owner received a Roth IRA distribution on July 15, 2019, and later rolls over the assets, the IRA owner will not be eligible for another IRA rollover until July 15, 2020.

If an IRA owner takes a distribution and later rolls only a portion of it back over into an  IRA, is she no longer eligible to roll over the remainder of the distribution due to the one-per-12-month rule?

No. An IRA owner may complete a rollover through multiple rollover contributions made to the same or a different IRA, provided they are all completed within 60 days following the date the IRA owner had constructive receipt of the distribution. The one-per-12-month rule allows only one distribution in a 12-month period to be rolled over into an IRA or IRAs within 60 days.