TWO IRA Rollovers From ONE Account in ONE Year: Nothing Good Happens

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

What happens to your IRA if you accidentally do two rollovers in one year? Nothing good.

If you request two distributions on two different dates, then you can decide which one you want to rollover with the 60-day rollover period. As long as you have the funds, the smart choice is to roll over as much as you can of the larger distribution. This reduces the amount you will have to include in income for the year and any 10% early distribution penalties you might owe.

The tougher scenario is one that an advisor asked me about recently. A client had two distributions from one IRA within a one – period. He had rolled them both over. Now it was time to fix the situation. The client wanted to know if he could “keep” the larger rollover and “undo” the smaller rollover thus reducing his taxes and penalties on his mistake.

Unfortunately for this client, the larger rollover was the second one he had done. He has no choice of which rollover to keep. Once a rollover is done, any subsequent rollovers within the one-year period generally become excess contributions in the IRA account, and the second rollover is the one that he must undo.

He has until October 15 of the year after the excess contribution to remove it from the IRA – plus or minus earnings or losses on the excess contribution. He must tell the IRA custodian he is removing an excess contribution so it will be properly coded on the IRS Form 1099-R issued for the distribution. He will owe taxes and penalties, if applicable, on the original distribution – the one he inadvertently rolled over.

When the excess contribution is not timely corrected, then the client will owe a penalty of 6% per year for every year that the excess amount remains in the IRA. He must file Form 5329 to calculate and report this penalty to IRS. This form is considered a stand-alone return. If it is not filed, the statute of limitations does not start to run. IRS can, and has, come back at any time to collect the penalty, interest, failure to file penalties, and, if the amount owed is large enough, accuracy related penalties.

This is not something you want to ignore if you are in a similar situation. Unfortunately, many IRA custodians put their clients at risk by making it easy for them to receive a check to move their funds and making it virtually impossible for them to do a direct transfer to a different IRA account. Direct transfers are not subject to the once-per-year limit.

Beginning in 2015, you will only be able to do one 60-day rollover a year, no matter how many IRA accounts you have. I have no doubts that we will see many clients losing their retirement savings when they are simply trying to move their IRA funds. Compounding this problem is the inability of IRS to allow you to correct the problem. They do not have any authority under the tax code to give you a “do over.”