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Things to Avoid with Rollovers

Over the past several months, our office has had several instances of clients or potential clients not understanding the IRS rollover provisions. Generally speaking, if you have your current custodian directly transfer your fundsto your new custodian

By: Jack Kiley

IRA Insights

Over the past several months, our office has had several instances of clients or potential clients not understanding the IRS rollover provisions. Generally speaking, if you have your current custodian directly transfer your fundsto your new custodian (referred to as a trustee to trustee transfer), you will avoid any tax (and penalty) issues regarding the rollover. The following are some of the more common rollover issues:

Calculating the 60 day period. The sixty day period is sixty consecutive calender days from the day you receive the funds. This includes weekends and holidays. Keep in mind that some months have 31 days, so don’t figure that if you received the funds on December 15 that you
would not need to deposit them in another IRA until February 15. The actual date would be February 13.

Rollovers from a Traditional IRA to a Roth IRA. These are not allowed. You must first convert your IRA to a Roth and then roll it over or complete the rollover to a Traditional IRA and then convert it to a Roth. If you complete incorrect paperwork (Roth paperwork when you need Traditional IRA paperwork), the custodian will not accept your rollover until you complete the correct forms. This could add a couple days to the process.

Like kind rollovers. If you received a cash distribution, you must rollover cash. If you received an ‘in kind’ distribution, securities for example, you may rollover the securities or liquidate these and rollover cash. We have had a few instances where clients have received cash and, as the sixty day period neared its end, wanted to deposit securities. This is a no-no.

Partial rollovers. When a client takes a distribution and is under 59 1/2 years of age, the custodian is required to withhold 20% for federal income tax thus netting a payment of 80% of the total amount distributed. Then the client will turn around and deposit the funds received into an IRA account within the sixty day period. This avoids tax and penalty only on the 80% re-deposited.

The client must cover ‘out of pocket’ for the other 20% that was withheld as income tax. Remember, the total distribution includes the tax withheld (and remitted to the IRS) on your behalf. As a matter of course, you will not get the 20% withholding back until you file your tax return for that year. These are the most common rollover issues we receive in our office. Carefully planning your rollover and consulting with your advisors will eliminate costly issues.

Jack Kiley, CPA - Partner, Entrust MidAtlantic, LLC. Serving the states of Maryland, Virginia, DC, and the Western Counties of West Virginia.

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