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George F. Bearup, J.D. Senior Legal Trust Advisor

21-Jun-21

Rollover Refresher

Take-Away: The IRS’s rollover rules are highly complicated. Often there is confusion when an amount is rolled over at the end of a calendar year. It is important to remember that the one-rollover per year rule is a 365-day rule, not a calendar year rule.

Background: Often there is confusion when an IRA owner rolls over his or her IRA to a new IRA and we come to the end of a calendar year. Many IRA owners in 2020 may have taken a rollover late in 2020 due to furloughs, layoffs, etc., with the intent to move the withdrawn funds into a new IRA early in 2021. Specifically, the question is whether the rollover amount must be reported as a taxable distribution if the withdrawn funds have not completed their transfer into the new IRA account within 60 days. There is a bit more reporting required when the IRA rollover remains incomplete at the end of the calendar year.

One-Year Rule: Recall that one rollover is permitted in a year, but a year is 365 days, not one rollover each calendar year. If the 365-day rule is violated, then the funds are treated as a taxable distribution to the IRA owner.

  • 365 Days: The 365-day period begins with the date that the IRA owner receives the distribution that is intended to be rolled over within 60 days to avoid taxation. As a result, the start of a new calendar year, going from 2020 to 2021, does not start a new 365-day period.

Example: Jeff takes a rollover from his IRA on December 20, 2020. Jeff has until February 18, 2021 to complete the rollover, and avoid income taxation on the IRA distribution and also avoid the 10% penalty for an early distribution from his IRA. Jeff may not engage in another rollover of his IRA until December 21, 2021.

  • All IRAs: The one-rollover-per-year rule permits one rollover from all IRAs owned by the IRA owner in the 365-day period. Thus, the once-per-year rule applies to the IRA owner, not to each IRA that is owned.

Rollover Reporting: Assuming that the IRA owner took a distribution from his or her IRA in late December 2020. The IRA owner plans to transfer the funds to a new IRA within 60 days of the distribution to avoid taxation of that distribution. The reporting steps for the incomplete rollover at the end of 2020 follow:

  • Form 1099-R: The IRA custodian that distributed the funds to the IRA owner will report the distribution on a 2020 Form 1099-R.
  • Form 5498: The receiving IRA custodian reports the received funds on a 2021 Form 5498.
  • Form 1040: The IRA owner reports the distribution and the rollover on his or her 2020 Form 1040.

RMDs and Rollovers: Required minimum distributions (RMDs) were waived for 2020, but not for 2021. A rollover that is not completed by the end of the calendar year can affect the IRA owner’s RMD for that year in which the rollover occurs. The amount of the rollover in-transit must be included in the IRA on the December 31 snapshot date to determine the next calendar year’s RMD. This rule obviously is intended to prevent an IRA owner from ‘gaming the system’ by reducing his or her December 31 IRA account balance to $0.00 and thus avoid having to take any RMD for the next year.

Conclusion: As has been repeated endless times in the past, it is best to completely avoid a 60-day IRA rollover and do a straight custodian-to-custodian transfer of the IRA assets. A custodian-to-custodian transfer is not a rollover, which thus avoids: (i) the tax and penalty trap if the transfer between IRAs is not completed within 60 days; and (ii) the only one IRA transfer every 365 days rule.