Self-Directed IRA Rollover

Rollovers are the most common way to transfer funds to a self-directed IRA. A transfer and rollover are two transactions that allow you to move your retirement assets between IRAs (individual retirement accounts) and 401(k) plans.

In general, all transfers or rollovers between retirement funds are not subject to any tax. Transfers occur between individual retirement accounts. A rollover occurs between an IRA and another type of retirement account, like a 401(k) plan. In other words, a transfer occurs when you send funds from one IRA to another. A rollover occurs when you transfer funds between an IRA and a different retirement account, like a 401(k) or 403(b).

When you roll over a retirement plan distribution, you don’t usually pay tax until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax deferred.

How To Complete a Self-Directed IRA Rollover?

Direct Rollover

If you receive a distribution from a retirement plan, ask the plan administrator to make the payment directly to another retirement plan. Or ask that it go to a Self-Directed IRA. The administrator may issue the distribution in the form of a check. This will be made payable to your new account. No taxes are withheld from your transfer amount.

Trustee-to-trustee transfer

You can also complete a self-directed IRA rollover using the trustee-to-trustee transfer. If you receive a distribution from an individual retirement account, ask the financial institution holding the IRA to make the payment directly from that IRA to another IRA. For example, you can have the funds sent to a Self-Directed IRA or to a retirement plan. No taxes will be withheld from your transfer amount.

60-day rollover

If a distribution from an IRA or a retirement plan is paid directly to the retirement account holder individually and is not going directly to the retirement account, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. This is an indirect rollover.

Indirect rollover in Depth

If you take a 60-day rollover of cash (indirect rollover), then you must return the same amount within 60-days. For example, if you tax a 60-day rollover of $45,000 from your IRA, you need to return the $45,000 within 60 days. If you take out $5,000 and purchase a piece of land, you can’t use the land as part of the 60-day rollover. In other words, cash for cash or property for property. This is what’s necessary in order to satisfy the 60-day rollover rule.

In the example above, let’s assume you return $35,000 of the $45,000 rollover amount. Only the $10,000 would be subject to tax. Additionally, you will have a 10% early distribution penalty if you’re under the age of 59 1/2.

An indirect rollover occurs when the individual retirement account assets or qualified retirement-plan assets are moved. It first goes to the IRA holder or plan participant before ultimately going to an IRA custodian. Usually, you have 60 days from receipt of the eligible rollover distribution to roll the funds into an IRA. The 60-day period starts the day after you receive the distribution. There are typically no exceptions to the 60-day time period. There are cases where the 60-day period expires on a Saturday, Sunday, or legal holiday. As a result, you may execute the rollover on the following business day.

Related: Alternative Investments & IRA Custodians

Measurements to Avoid Abuse

To avoid abusing the rule, the tax code prescribes that taxpayers can only complete an IRA rollover once a year. Or, once in a twelve-month period. In the past, the IRS (Internal Revenue Service) has interpreted this to apply to IRAs on an account-by-account basis. As a result, this treatment of “separate accounts” due to the IRA rollover rule potentially allows taxpayers to chain together multiple IRA rollovers. This will be in an attempt to avoid the one-year rule and gain “temporary” use of IRA funds for an extended period of time.

It may seem like the Internal Revenue Service’s Publication 590 suggests that the 60-day rule applies to separate IRA accounts. Yet many tax professionals often advise clients that the IRS may interpret the rule to apply to all IRAs. This is because of the potential for abuse of the 60-day distribution rule.

Bobrow Case – One Indirect Rollover Allowed Every 12 Months

A recent tax court decision clarified how the IRS interprets the 60-day rollover rule and whether it applies to all IRAs or to separate IRAs. With the decision in Bobrow versus Commissioner, the IRS shut down the separate-individual retirement accounts rollover strategy altogether. In the aftermath of the Bobrow case, the IRS issued the IRS Announcement 2014–15, stating that it would:

• assent to the tax court decision
• update its proposed regulations and Publication 590
• issue new proposed regulations soon that will definitively apply the one-year IRA rollover rule on an IRA-aggregated basis going forward

So what does all this mean?

It is important to remember that this 60-day rule applies only to indirect rollovers. In other words, to funds that you do not transfer directly between retirement account custodians. This includes financial institutions, banks, trust companies, and so forth. When funds are moved from a retirement to a retirement account, that’s considered a direct rollover or IRA transfer. In that case, there is no 60-day limit or any limit on the number of direct rollovers that can be done in a year.

So in summary, as long as the funds are being moved from one retirement account to another, it can be done as often as you would like. And it’s only when the retirement funds are sent to you individually that you have 60 days to re-contribute those funds to a retirement account. You can only do this once every twelve months. Additionally, any amount that’s not re-contributed is then subject to tax, as well as a ten percent penalty if you’re under the age of 59 1/2.

60-Day Rollover from an IRA vs. 401(k) Plan

Taking a 60-day rollover is far more tax-efficient than an individual retirement account. The reason is, there’s no withholding tax on the IRA rollover. Whereas, in the cases of a rollover from a 401(k) plan, taxes will be withheld from a distribution. You would have to use other funds to roll over the distribution amount. In general, before taking a distribution from a 401(k) plan, you have to satisfy a plan “triggering event.” In general, a “triggering event” is any event that allows the Plan participant (you) to become eligible to make a withdrawal. A triggering event can include the termination of employment with the employer that sponsors the plan, or even disability.

Therefore, if you are over the age of 59 1/2 or leaving your job, you are eligible to roll the 401(k) funds into an IRA without tax or penalty. The advantage of taking a taxable distribution from an IRS versus a 401(k) plan is that distributions from an IRA are not subject to the 20% withholding tax.

Summary

Self-Directed IRA transfers and rollovers are always tax-free and can be done without limit so long as the funds go directly from one retirement account to another. This is one of the reasons why they are done so frequently.

Two of the most common reasons for rolling over is not wanting to leave assets behind at the former employer (24 percent of traditional IRA–owning households with rollovers). The second is wanting to preserve the tax treatment of the savings (18 percent of traditional IRA–owning households with rollovers). Another 17 percent of traditional IRA–owning households with rollovers indicated their primary reason for rolling over was to consolidate assets.

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