Understanding the Details of IRA Rollover Restrictions
By Stacy Torkelson, CISP, CHSP, CFCI, QKA, SDIP
My client has two checks, one for $10,000 and another for $35,000, that were issued to him from two separate Traditional IRAs. Is he allowed to roll over both of those checks (for a total of $45,000) into a Traditional IRA with my financial organization?
No, that is not permitted. IRA-to-IRA rollovers are subject to the “one-per-12-month” restriction. Meaning that individuals may roll over only one IRA distribution during a 12-month period. Because the client has two separate distributions, he cannot roll over both to an IRA, even if he were to do the transaction as one deposit.
The reason for this seemingly onerous restriction is to limit access to IRAs for secondary purposes and ensure that they are used for the primary purpose of providing retirement income. Because IRAs are ‘on-demand’ accounts, an individual can withdraw funds at any time, but the one-per-12-month rule helps to discourage individuals from engaging in short-term borrowing from IRAs by limiting their ability to return the money.
Individuals who want to move their IRA funds in order to take advantage of different investment options may still complete an unlimited number of transfers between IRAs.
Roth IRA conversions and rollovers to and from qualified retirement plans are not subject to the one-per-12-month rule. If you have a client who did not fully understand this restriction and now has an ‘extra’ distribution that he would prefer not to keep, the client could roll over one distribution and then either convert the other distribution to a Roth IRA (which may be a taxable event) or roll it over to a qualified retirement plan that he may be participating in, if the plan accepts rollover contributions.
My client’s 60-day period ended on a Sunday, is he permitted to complete his rollover on the following business day?
No, the 60-day rollover deadline is not permitted to be extended if the 60th day lands on a Saturday, Sunday, or legal holiday. There is no extension for this individual deadline, making it different from deadlines that apply to all taxpayers (such as tax-return due dates) which are extended to the following business day in instances where the actual deadline falls on a Saturday, Sunday or legal holiday.
My client would like to roll over money from his qualified retirement plan to an IRA. He is retiring this year. Does he have to take his RMD before he can roll over the money to his IRA?
Yes. Many qualified retirement plans will permit nonowner participants to delay their RMDs until the year that they retire instead of requiring them to being taking RMDs at age 73. However, in the year of retirement, they will have an RMD that needs to be satisfied before they can roll over any money from that plan. This is true even though they would normally have until April 1 of the following year to take the RMD. It is also important to note that satisfying the RMD is necessary even if a direct rollover is completed before the date in that calendar year that your client retires.
In this situation, the employer should first pay the RMD amount to the client, and then she can directly roll over the remaining balance to the IRA.
I have a high net-worth client who would like to roll over his child’s 529 plan to his own Roth IRA. He is ineligible to make regular Roth IRA contributions because his modified adjusted gross income (MAGI) exceeds the limits and he would like to get as much money in his Roth IRA as possible. Is he allowed to do this?
Rollovers from 529 Plans to Roth IRAs will be permitted starting in 2024, but there are a number of restrictions that will be associated with these rollovers when they become available.
First of all, the 529 plan assets must be rolled over to the designated beneficiary’s Roth IRA, not her parent’s Roth IRA. (The designated beneficiary is generally the student for whom the 529 plan was set up for). Additional guidance is likely needed for possible restrictions and exceptions to changing the 529 plan designated beneficiary and how that could affect 529 plan-to-Roth IRA rollovers.
In addition, the 529 plan must have been opened for at least 15 years, and the assets to be rolled over must have been in the 529 account for at least 5 years. The IRS may have to provide clarifying guidance on these issues, including how to determine when particular amounts have satisfied the 5 year requirement.
The designated beneficiary must also meet the requirements to make Roth IRA contributions (she must have earned income and MAGI that does not exceed the IRS-specified limits). The rollover amount in any given year cannot exceed the designated beneficiary’s IRA contribution limit, reduced by any IRA contributions previously made for the year. The total (lifetime) rollover amount is limited to $35,000.
These restrictions may have been added in order to ensure that high-net worth individuals do not attempt to use this provision as an additional Roth-funding loophole. The ability to roll over these funds is restricted to situations where a modest amount of unused savings was originally accumulated to fund higher education expenses.
