IRA Rollover Rules, Roth IRA Contributions Highlight Slott Report Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week’s Slott Report Mailbag includes questions on the IRA rollover rules, making Roth IRA contributions from 457(b) required minimum distributions (RMDs) and the 60-Day rollover rule as it applies to 401(k) plans. We answered the mail this week from the Arizona Biltmore in Phoenix, where we are stationed all week for Ed Slott’s Elite and Master Elite IRA Advisor Group Workshop. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I attempted to consolidate two IRA accounts into a single one. The old accounts were at one bank and the checks were made payable to me. When I tried to open a rollover account at the new bank on the same day, I was told that only one transfer was allowed per year. They suggested that I call the IRS, which told me that the bank’s information was accurate. To me, this defies logic. Do you agree that one of the transfers is tax-free, but the other is not?

Rufus Moore

Answer:
Generally when funds are withdrawn from an IRA, the rollover to another IRA (or other retirement account) must be completed within 60 days from the date the funds were received by the IRA owner. You can only do one rollover PER ACCOUNT per year (365 days). In your case, it is not clear if the money came out of one or two separate accounts. If you had two accounts, you would be able to rollover both distributions (one rollover per account). It would also be okay if you received the checks from the same account on the same day. Otherwise one distribution is eligible for a tax-free rollover and one is not and is not tax free.

You should always do trustee-to-trustee transfers (also called “direct rollovers” or direct transfers”), as the funds go directly from one IRA custodian to another, without touching the money in between to avoid the once-per-year rule.

2.

Can someone take a distribution out of their 401(k) and within 60 days put the money back into the same 401(k) and not be taxed on any of it.

The key to this question is he or she takes the money out of the same 401(k) and puts it back into the same 401(k), and he or she is still making annual contributions to the 401(k) plan.

Thanks!

Answer:
IRS regulations allow money to be withdrawn from a 401(k) plan and then put back within 60 days to avoid having to pay income tax on the distribution. However, the plan may have its own restrictions on accepting rollovers. Please check your plan to determine if it allows rollovers and under what circumstances.

3.

Since retirement, I must withdraw a life-expectancy-calculated amount of money from my deferred compensation that is in a 457(b) plan. This money is subject to taxation; is it permissible to use the remaining withdrawn money for an allowable contribution to my pre-existing and separate Roth IRA?

Answer:
You can only make Roth contributions if you have earned income equal to or greater than your contribution. Retirement distributions are not considered income for the purpose of contributions. Once a distribution from a retirement account is in a non-IRA account, you can use the funds for any purpose. Keep in mind that there are still income phase-outs with Roth IRA contributions. In 2012, filing jointly, it starts to phase out at $173,000 and completely phases out at $183,000. For single filers, the phase out is $110,000 – $125,000. You can find the complete 2012 IRA and tax tables at this link.