By Sarah Brenner, JD
The road to retirement is long. Along the way you may need to move the funds in your IRA. When that time comes, you will want to be sure that everything is done correctly. Moving your retirement funds can be tricky and the consequences of a mistake can be serious.
If you decide to move your funds to another IRA by doing a rollover, there will be many rules you will need to follow. The IRA distribution must be deposited as a rollover into the other IRA within 60 days from the day you receive it. Also, you are limited to one IRA-to IRA rollover within a 365-day period. This is true even if you have multiple traditional and Roth IRAs.
RMDs Cannot Be Rolled Over
If you are 70 ½ or over during the year, rollovers will come with an extra rule. Your RMD may not be rolled over. The way the rules work, the first money out of the retirement account is the RMD for the year. You do not have the option of rolling over the full amount and simply taking the RMD later. Instead, you will need to take the RMD at the time of the distribution. Any amount above the RMD amount can then be rolled over.
Example: Pam, age 75, takes a $200,000 distribution from her IRA. Her RMD for the year is $15,000. Only $185,000 can be rolled over to an IRA. Pam cannot roll over $200,000 and plan on taking her RMD later in the year.
The consequences of rolling over an RMD are messy. You cannot just take the RMD amount from the retirement account to which the funds were rolled over. Instead, the RMD amount is considered to be an excess contribution in the receiving account. This will result in a 6% penalty if it is not timely corrected.
Example: If Pam from our previous deposits the entire $200,000 distribution, she will have an excess contribution of $15,000 in her IRA. If this is not timely corrected, Pam will owe a 6% penalty for each year that the $15,000 remains in the IRA.
Rule Does Not Apply to IRA-to-IRA Transfers
Is there an easier way to move your IRA funds? Yes! You can do a trustee-to-trustee transfer. You will not need to worry about the 60-day rule or the once-per-year rollover rule. You also won’t have to worry about the rule regarding RMDs. These rules do not apply to direct trustee-to-trustee transfers between IRAs.
If you transfer your IRA, you may transfer the entire account and take the RMD later from the new IRA. You should be especially careful to monitor these situations to ensure that the RMD actually does come out by the deadline. The new IRA custodian will have no way to know that your RMD needs to be taken.
Example: Pam decides to transfer her IRA funds instead of rolling them over. She may transfer her entire $200,000 IRA, including the $15,000 RMD, to a new IRA. Pam must be sure to take the $15,000 RMD from the new IRA by the end of the year.