IRA to IRA to IRA Rollover in one year?

Why surfing the interwebz, we’ve run into some potentially misleading information.  Well, it most definitely can be interpreted as being misleading, but the intent of the individuals is unknown.  Of course, the point of this blüg is to make sure people don’t use this misleading information.  So, regardless of what someone’s intention is, we hope people walk away with more knowledge than they did before they invested a few minutes in what we have written.

Over at Retire by 40’s blüg, “Ray” gave some advice in the comments that certainly deserves an asterisk.  And, we put that asterisk in the comment section.  But, here is what “Ray” said which could be misleading.

What people don’t understand is you can roll it over to say Vanguard and if you don’t like them, then roll it over to Etrade and if you don’t like them, roll it over to Schwab etc.

Usually from start to finish it’s no more than 7-10 business days if you do it right…

The implication here is that you can just rollover whenever you please.  Which is true, but not without consequences.

My Dollar Plan didn’t care for anything we had to say.  They’ve offered up getting $50 for rolling over to a Merrill Edge IRA (assumed to be an affiliate link).  They also noted the rollover IRA had to be held for at least 90 days with Merrill.  We left them a comment alerting anyone reading that they need to leave their money in the account much longer than 90 days (if one wants to avoid taxes and penalties).  But, they didn’t like it, so it was never published.  So, as long as they score with their affiliate link, why worry about your interest?  Which is why we want to make sure everyone is aware of the frequency they can do an IRA to IRA rollover without taxes and penalties.

For the answer of how frequently we can do an IRA to IRA rollover, we go to our favorite IRS publication, “Pub 590” page 23, under the title, “Waiting period between rollovers.”

Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

You must wait 1 year between IRA to IRA rollovers.  This 1 year does not apply to rollovers from employer sponsored plans or conversion/recharacterizations, which have their own rules.

But, the verbiage cited above from Pub 590 just says a traditional IRA, what about Roth IRA’s?  There is confussion about this as well in the interwebz.  This most likely stems from the following excerpt of Pub 590 under the title of “Can you move amounts into a Roth IRA?”:

Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, the 1-year waiting period does not apply. (pg 60)

Well, this section is talking about conversion and rolling into a Roth IRA.  What does it say about rolling over from a Roth IRA?

Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers. (pg 62)

Our interpretation is, to rollover from an existing Roth IRA, the rules cited on pg 23 of Pub 590 (and the important parts are quoted above) are applicable to Roth IRA’s as well.  It should be noted that if you do a Roth IRA to Roth IRA rollover more than one time in a year, it will be counted as a non-qualified distribution.  Roth ordering rules will apply, so you will only get hit with taxes and fees after you burn through your basis (aka contributions).  But you gain nothing, so wait a year.

The IRS tends to care only about your basis (contributions) earnings, conversions etc and not so much which account the funds come out of.  This is one part of the tax code where the actual account matters.  You can, however, play around with multiple accounts (why you would want to is beyond us) to do more than 1 IRA to IRA rollover in a year.

EXAMPLE: You have $20k in IRA1 and $20k in IRA2.  You rollover $10k from IRA1 to a new IRA, IRA3.  You can then, at anytime, without penalty, rollover any amount from IRA2 to any other IRA accounts.  Using any funds from IRA1 or IRA3 for a rollover within 1 year will trigger taxes and penalties.

And of course, the lone exception to the 1 year IRA to IRA rollover rule is if your bank becomes insolvent and you get money from the FDIC.  Let’s all hope we never have to go through that!

There you have it.  Wait one year between IRA or IRA rollovers.


2 Responses to “IRA to IRA to IRA Rollover in one year?”

  1. April 21, 2012 at 7:08 am

    I did not realize that taxes and IRAs can be so complicated. Luckily I don’t plan on rolling over my Roth IRA anytime soon.

    • April 21, 2012 at 7:38 am

      Hey Jessica! Thanks for stopping by! We certainly hope we didn’t scare you (or anyone else) off about saving. On the surface, they are very simple if you use them for what you intend them to be used for. But when you start all the trickeration you read about on the interwebz, they can be extremely difficult.

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