Transcript:
Today’s question comes from Mike in Celebration. I want to do a rollover from one IRA to another. I read I have 60 days to get it done, but no one mentions when that clock starts. Is it when the check is cut or when I cash it? Well, Mike, it’s neither. The 60-day window begins the day you receive the check from the issuer. I’ve always found that it’ll be a little odd ’cause the date on the check, the date you cashed the check, even the date on the postmark of the envelope. Well, that’s gonna be a lot easier to document. But that’s the tax law. And nonetheless, that’s the rule.
But you need to be careful about this rollover, Mike. There are risks involved. Getting money sent to you from one IRA and then depositing those funds back into an IRA. In the 60-day window is often referred to as a traditional rollover, a 60-day rollover, or just a plain rollover done properly. There’s no tax liability. It’s happens all the time, but done wrong, it can cost you. You can only do a 60-day rollover once in a 12-month period. This means if you’ve done one recently, you shouldn’t do one now. And after you do this one, you should avoid doing another one for at least 12 more months. Otherwise, that rollover will be invalid. That makes it taxable. And if you’re younger than 59 and a half, an additional 10% penalty can apply, but we don’t want that. Uh, in addition, an IND rollover may cause something called an excess contribution.
That’s a problem because the penalty for an excess contribution is 6% per year every year going forward until it’s fixed. Now all of these issues can be avoided by using a different rollover method. We explain that and some other important rollover twists in the post on our website titled When does the 60 day period for IRA rollover Start. Now, also in that post is a rundown of other q and as that we’ve produced stories in which we served as a source and some news items of note. As always, if you have questions, please contact us. We’d love to hear from you.
When does the 60-day period for IRA rollovers start?
Today’s question comes from Mike in Celebration, FL. “I want to do a rollover from one IRA to another. I read I have 60 days to get it done but no one mentions when that 60-day rollover clock starts. Is it when the check is cut or when I cash it?”
Mike, it is neither. The 60-day rollover window begins the day you received the check from the issuer, not the date on the check, the date in the postmark on the envelope with which the check was mailed to you, or the date you cash the check. The 60-day rollover window ends when the funds are deposited and all days count so if the window ends on a weekend or holiday, you will want to make the deposit the business day before that.
Done incorrectly, a 60-day rollover can cost you.
Be careful about this rollover, Mike. There are risks involved. Getting money sent to you from one IRA and then depositing those funds back into an IRA in the 60-day rollover window is often referred to as a “traditional rollover,” an “indirect rollover,” a “60-day rollover,” or just plain “rollover.” Done properly, there is no tax liability.
You will receive a Form 1099-R early next year. You simply report that amount on your Form 1040 on line 4a “IRA Distributions.” Then put zero on line 4b “Taxable Amount” and note on the return the word “Rollover.”
Done incorrectly, a 60-day rollover can cost you.
You can only do a 60-day rollover once in a twelve-month period. Like the 60-day window, the twelve-month period begins the day you receive the check from the issuer. So, if you have done a 60-day rollover in the last twelve months, you shouldn’t do another one for another twelve months. Otherwise, the rollover will be invalid and taxable. If you are younger than 59 1/2, an additional 10% penalty can apply. We don’t want that!
In addition, an invalidated rollover may cause something called an “excess contribution.” That’s a problem because the penalty for an excess contribution is 6% per year every year going forward until it is fixed.
See, the only way taxpayers are allowed to deposit to an IRA is a valid rollover or an annual contribution. Annual contributions are subject to a limit. For 2024, the limit is $7,000 or $8,000 if you are over age 50.
Say you made a $50,000 rollover that is deemed invalid. If you had earned income and were eligible to contribute to an IRA, you may have made a $42,000 excess contribution. If you were not eligible to contribute, the excess contribution would be the full $50,000. That equates to a $3,000 penalty (6% of $50,000) just for the first year the excess remains in the IRA.
These tax issues can be avoided simply by using a different rollover method. Instead of having a check made payable to you and redepositing to an IRA within 60 days, instruct the issuer to make the funds payable to the IRA at the receiving firm. These transfers are often called “direct rollovers” or “trustee to trustee transfers.” Transfers from one traditional IRA to another traditional IRA do not generate 1099-Rs so there is nothing to do or worry about when filing your tax return.
While only one 60-day rollover is allowed in a twelve-month period, there are no limits to the frequency of the direct rollovers described above. As a result, we have a strong preference for the direct rollover method.