How to Know IRS Rules Regarding IRA Transfers

If you’ve ever considered moving your IRA from one location to another, you’ve probably also been concerned about a penalty. And you should be! The rules about transferring or rolling over IRAs are so confusing that even professionals sometimes lead people astray. The principles below can’t possibly apply to every unique situation, but if you keep them in mind, you should avoid problems.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• A traditional or Roth IRA account, or another retirement plan you wish to move into one.

1. Start by understanding the difference between a transfer and a rollover. Confusing the two is the biggest mistake people make when moving IRA accounts. It’s very important, because under IRS rules, you can transfer an IRA as often as you want, but you are only permitted to roll over an IRA once every 12 months. Do it more often then that and you are likely to incur a 10% penalty.
2. Arrange a transfer by instructing the custodian of your IRA that you want to move the account without taking a distribution. Request that it be handled as a trustee-to-trustee transfer so that you never actually take possession of the money. This is the key difference between a transfer and a rollover; in the latter, the money passes through your hands on its way from one institution or account to another.
3. Use an alternate procedure if a trustee-to-trustee transfer isn't possible; if you are not moving the entire IRA account, it may not be. For example, say your IRA is in two different funds from the Nest-Egg mutual fund family. You aren't happy with the way one of them is performing so you want to move that portion of the account to a new high-yield CD at Rocksolid Bank. In this case, you will probably need to withdraw the money in the form of a check. Be sure to instruct the fund company that the check must be issued to the bank and NOT to you. Although the check will most likely be sent to you, the payee should look something like this: “Rocksolid Savings and Loan FBO Jane Doe IRA.” The “FBO” stands for “For the Benefit Of,” and it means that you would not be able to cash the check yourself. So you still haven’t taken possession of the money and it is still a transfer, not a rollover.
4. Deposit your FBO check with your new IRA custodian. As long as it has been made out in this format, the IRS will not consider you to have received a distribution from your IRA. This means that if you find a higher-yielding CD at another bank, you can turn around and transfer your IRA again whenever you like. You won't have to report this type of transfer on your tax return, and you would not receive a 1099R form from the custodian for the tax year in which the transfer is made.
5. Understand one important exception to the transfer procedure. if you are taking money from a 401(k) or other company retirement plan and moving it into a traditional IRA account, the IRS ALWAYS considers it a distribution. This applies even if you arrange a trustee-to-trustee transfer and never take possession of the money. A transfer from a company retirement plan is treated like a rollover, and can only be made once in a 12-month period. When you do this type of transfer, you will receive a Form 1099R from the company and you will be required to report it as a rollover on your tax return.
6. To summarize: if you are moving money from one traditional IRA to another, or from one Roth IRA to another, you can do so as often as you like as long as you do not actually receive the money. But if you are moving money into an IRA from another type of retirement plan, or if you need to actually take possession of the money for a short period of time – the limit is 60 days – it’s best to work with a qualified tax professional to make sure you understand all the implications and avoid any penalties or other problems.ATTENTION EDITOR: I have edited this piece as per your requirements but because the subject is "knowing" something rather than building/making/assembling something, I believe it is useful for the reader to have a summary at the end. I don't see a way to make a summary start with an actionable verb, and I have had discussions with the editorial team about the fact that occasional exceptions to this requirement are permitted when they seem appropriate to the content of the article. If your editorial approach is different or the rules have changed, I am providing an alternate Step 6 -- you can delete this message and the previous text and use it instead.(Step 6)Consult with a qualified tax professional if your situation is significantly different from those discussed here. The Resources links may provide further guidance.