17-May-22
“Same Property” Rule
Take-Away: When rolling over funds from an IRA to an IRA, the same property must be used in the 60-day rollover transfer.
Background: For an IRA to an IRA 60-day rollover transfer, or a Roth IRA to Roth IRA 60-day rollover transfer, the same property that is received must be the same property that is rolled over to the IRA. This basic same property rule also applies to rollovers associated with SIMPLE IRAs and SEP IRAs.
Example: Brady takes an $80,000 cash distribution from his IRA. Brady cannot purchase stock with the $80,000 distribution and roll over that purchased stock to his IRA within 60 days. Because cash was distributed to Brady, cash must be deposited by Brady as his rollover contribution to his IRA.
Example: Alice takes a distribution of 100 shares of Apple stock from her IRA. Alice must roll over the same 100 shares of Apple stock to her IRA within 60 days to complete the transaction, regardless of whether the price of Apple stock has gone up, gone down, or remained the same since the initial distribution to Alice.
Key Point: It is the same property rule, not the same value rule that is applied with a 60-day rollover to an IRA.
Exception to the Same Property Rule: An exception to the same property rule applies when the rollover is distributed from an employer’s qualified retirement plan, e.g. a 401(k) plan. The recipient has a choice: either (i) roll over the same property distributed from the qualified plan to an IRA; or (ii) sell all or a part of the property that was distributed from the qualified plan and roll over the cash proceeds from the sale. This is true even if the sales proceeds are greater than or less than the value of the property when it was distributed out of the qualified plan to the recipient. In other words, the recipient-participant cannot retain the distributed property and substitute the recipient’s own property for the property that was received on the distribution from the qualified retirement plan.
Example: Alex receives a distribution from his employer’s 401(k) qualified plan that consists of $10,000 cash and $15,000 of Netflix stock. Alex decides to retain the Netflix stock in his own name. Alex can roll over to a traditional IRA the $10,000 cash that he received from the 401(k) plan, but he cannot roll over an additional $15,000 of cash that represents the Netflix stock that Alex chooses not to sell. However, if Alex sells the distributed Netflix stock and rolls over all of the proceeds into his traditional IRA, no gain or loss will be recognized. The sales proceeds (of the Netflix stock) is treated as part of the distribution that Alex received from the 401(k) plan and the proceeds are not included in Alex’s gross income for the year.
Conclusion: The same property rule tends to trip up those individuals who engage in 60-day rollovers when property, i.e. shares of stock, is involved. Taking distributions of cash and contributing that cash to the IRA within 60 days is the safest course to follow. Taking distributions of property as part of a 60-day rollover is when the same property rule surfaces. Violating the rule results in taxable income and probably the 10% penalty for the failure to complete the rollover within 60 days. Remember: it is the same property rule that is applied, not the same value of the amount of the rollover distribution.