Final Four of Irrevocable IRA Rollover Mistakes

By Jeffery Levine, IRA Technical Expert  
Follow Me on Twitter: @IRAGuru4EdSlott

March Madness is upon us and we are down to the Final Four. No, we’re not talking about college basketball here… we’re talking rollover mistakes. The following is our Final Four list of irrevocable rollover mistakes. Make one of these mistakes and you’re sure to go mad over the ensuing tax bill. And worst of all, there’s no fix for any of these. Just like the NCAA tournament, it’s a one and done game.

1) An individual may make only one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover per year.
Once a 60-day rollover has been made, no further 60-day rollovers may be made from either the distributing or receiving account for the next year. In this case, a year is NOT a calendar year, it’s a full 365 days. Unfortunately, unlike the 60-day window itself, which IRS does have the authority to extend in certain circumstances, the IRS has no ability to waive the once-per-year IRA rollover rule.

2) A non-spouse beneficiary cannot do a 60-day rollover.
When a person other than the spouse of a deceased individual inherits an IRA or other retirement account, they must be extremely careful when moving money. Non-spouse beneficiaries cannot do 60-day rollovers. This means that a check cannot be issued in the name of the beneficiary, even if that check were later deposited into another inherited IRA within 60 days. Of course, this doesn’t mean that all non-spouse beneficiaries are stuck with the same investment and/or financial institution forever. They can still make trustee-to-trustee transfers of inherited funds.

3) An IRA cannot be rolled over into a trust.
An IRA is an INDIVIDUAL Retirement Arrangement. A trust is clearly not an individual, and therefore, cannot be the owner of an IRA. If IRA funds are moved “into” a trust, then the funds cease to be an IRA and the entire distribution is taxable. This is true both during life and after death. If this mistake is caught within 60-days during the lifetime of the IRA owner, however, they may be able to put the funds back into their own IRA to save the account.

4) NUA cannot be used if stock is first rolled to an IRA
When individuals have appreciated company stock in their company plans, they can often take advantage of NUA, one of the greatest benefits in the tax code. NUA, or net unrealized appreciated can allow individuals to trade ordinary rates (up to 35% in 2011) for long-term capital gains rates (up to 15% in 2011) on the appreciated portion of their company stock. The benefit, however, is only available when made part of a lump-sum distribution from the company plan, not from an IRA. So if the stock is rolled to an IRA first, the NUA option is irrevocably lost.