Investors looking to consolidate their individual retirement accounts—whether it’s to simplify their finances, reduce fees or get access to different investment options—have two options: a direct transfer or a 60-day rollover.
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With direct transfer, the funds typically move electronically, from one custodian to another. You or your financial adviser don’t touch the money as it goes from one financial institution—a bank, brokerage firm or mutual-fund company—to a second. A check from the sending custodian made payable to the receiving custodian that is sent to you for delivery qualifies as a direct transfer.
With a 60-day rollover, however, you withdraw money from your IRA and have 60 calendar days—starting the day you receive the funds—to place the money in another qualified account. If you miss the deadline, you must pay income tax on the distribution. And if you are under age 59½, you may also owe a 10% early-distribution penalty unless an exception applies.
Financial advisers usually recommend a direct transfer because of its simplicity, but there are sometimes good reasons to do a 60-day rollover. For example, you may want to use the money for a short period as a down payment on a new home and replenish it when you sell your current residence. Or you may be facing a short-term expense—say, a plumbing emergency—that requires temporary funds used within the rollover window.
While missing the 60-day deadline to return the funds can be a deterrent to taking this approach, financial advisers say a little-known 2016 revenue procedure by the Internal Revenue Service has offered a simple process to potentially avoid a penalty and taxes. Previously if the funds reached the receiving custodian after the deadline, you had to request an expensive and time-consuming private letter ruling to seek relief and avoid the tax.
The revised process, known as self-certification, allows an investor to explain to the receiving custodian why his or her rollover was late, using a model letter the IRS provides. If the reason falls into one of 12 approved categories—such as a serious illness, death in the family, a financial institution error, a postal delay, or even incarceration—custodians will generally accept the rollover as valid and the investor will face no tax or penalty.
This self-certification process is not a get-out-of-jail-free card, however, the IRS could still refuse the late rollover if it determines there was a violation of the rules.
Several Rules Worth Remembering
• When you do a 60-day rollover, the transaction generates tax forms that you must file with your income-tax return. The sending custodian provides Form 1099-R showing the distribution and the receiving custodian provides Form 5498 showing the corresponding deposit. Neither is necessary with a direct transfer.
• If you are at least age 73 and must do a required minimum distribution from your IRA, it has to be completed before making a 60-day rollover. In contrast, with a direct transfer you can move the entire amount and take the RMD from the IRA that received the money, possibly earning tax-deferred income until as late in the year as desired.
• You are permitted to do only one 60-day IRA rollover every 12 months, regardless of the number of IRAs you own. With direct transfers, there is no once-per-year limit.
Advisory Services are offered through MRA Advisory Group, a Registered Investment Adviser. It is general in nature that the statements herein are not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. The investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security, or (ii) tax or legal advice.