"The Pension Specialists" Blog

7 Cardinal IRA Rollover Rules

An individual who complies with the IRA rollover rules is not required to include an IRA distribution in their income, and if under age 59½, will not owe the 10% tax or the 25% tax as applicable. The general tax rule is, a person who receives an IRA distribution which is included in their income before age 59½ owes a 10% tax of the amount withdrawn unless an exception applies. However, there is a special rule for certain early SIMPLE-IRA distributions. The additional tax rate increases to 25% if a SIMPLE-IRA participant withdraws SIMPLE-IRA funds before he or she has satisfied a 2 year requirement unless an exception would apply.

There are seven (7) cardinal IRA rollover rules:

1. An RMD is never eligible to be rolled over
2. A person is authorized to rollover only one distribution within a 12 month period (365 days)
3. The rollover must be completed within 60 days of the distribution
4. If property is distributed (and not cash), such property must be rolled over. The property cannot be sold and the proceeds rolled over as is the case when property is distributed from a qualified plan
5. SIMPLE IRA funds may be rolled over into a traditional IRA, SEP-IRA, or 401(k) plan or vice versa only if the individual has met the 2 year requirement
6. A non-spouse beneficiary of an inherited IRA is never eligible to roll over a distribution from an inherited IRA; an
7. Roth IRA funds can only be rolled over into the same or a different Roth IRA. When can the IRS grant relief if an individual fails to comply with any of these 7 rules?

The IRS’ position is, we can grant relief if the individual failed to comply with the 60 day requirement, but if the failure is for any of the other six (6) rules, we can’t grant relief.

The IRS has been granted the authority by a 2001 tax law to grant relief to someone who has missed the 60 day rule because he or she incurred some difficulty or hardship and it would be unjust or inequitable for the IRS to not waive the 60 day rule for the individual. Waive means the IRS creates a new 60 day period for the individual to complete the rollover.

The IRS' position is - it does not have the authority to grant rollover relief to a person who fails to comply with any of the other rollover rules.

The IRS can't grant relief to any person who has taken multiple IRA distributions during a twelve month and makes an ineligible rollover contribution.

The IRS can't grant relief to a non-spouse beneficiary who was paid an unrequested distribution by an IRA trustee.

The IRS can't grant relief and allow someone to roll over a required distribution.

The IRS can't grant relief if a person receives an in-kind distribution from his or her IRA, sells the asset, and then impermissibly rolls over the sales proceeds.

If a distribution is ineligible to be rolled over for any of the non-Roth IRA reasons, such distribution will need to be included in the individual's taxable income except to the extent any basis was distributed. If such distribution is impermissibly rollover over, it will be an excess contribution subject to the excess contribution rules until corrected by withdrawal.