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How to avoid this common IRA rollover mistake

How to avoid this common IRA rollover mistake

The once-per-year limit on IRA-to-IRA rollovers is a terrible trap for unwary taxpayers. It’s easy to fall into, but also easy to avoid. Here is the rule: If you receive a distribution from an IRA, you cannot roll that distribution over into any IRA if the distribution is received by you less than 12 months after another IRA distribution you received that you rolled over into an IRA. That’s according to Internal Revenue Code Section 408(d)(3)(B). Meant to prevent IRA owners from “kiting” their IRA distributions (keeping money perpetually outside the IRA by a series of rollovers), the rule traps mostly innocent bystanders. For example, Investor A inherits an IRA from her deceased spouse. She cannot roll over a distribution from that inherited IRA if within the past 12 months she received a distribution from her own IRA account that she rolled over tax-free into an IRA. She’ll have to wait to take the distribution from the inherited IRA until after the 12 months have passed. Or, more tragically, Individual B who is losing mental capacity takes distributions from his IRAs without being aware of the financial effects. A guardian is appointed for him and tries to roll the money

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Avoid this fatal IRA rollover error

The IRS allows you to correct most errors. However, there is one error you cannot fix that could seriously harm your retirement funds. It’s a relatively new rule (became effective Jan. 1, 2015), and if you aren’t aware of it, it can cost you dearly. The rule: An individual can only do one 60-day IRA-to-IRA rollover per year (365-day period, not calendar year), regardless of how many IRAs he or she holds. A 60-day rollover refers to when an individual cashes out an IRA and receives custody of the money; they then have 60 days to deposit the money in another IRA before taxes and penalties could be applied. This rule does not apply to direct transfers from one IRA to another. A direct transfer — one in which the money is transferred directly from your IRA with one financial institution to your IRA with another institution — is the preferred method to move your IRA funds. You can do an unlimited number of direct IRA transfers. The IRS considers a check made out to the receiving IRA as a direct transfer so it’s not subject to the one-per-year IRA rollover rule. However, a check made payable to you is

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