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Showing posts with label Form 5329. Show all posts
Showing posts with label Form 5329. Show all posts

Roth IRA 60-Day Rollover Rules

Many times we get the question “Do the 60-day rollover rules apply to Roth IRAs?” The answer is, yes.

roth IRA 60-day rollover rulesWhen a distribution from a Roth IRA is made payable to the Roth account owner, the owner has 60 days from the date he receives the funds to roll the funds over to another Roth IRA. This type of rollover can only be done once every 12 months. No other rollovers can be done out of either the distributing Roth IRA or the
receiving Roth IRA. Funds can still be rolled into those accounts though.

But, funds are not locked in those accounts for a year. Even though you cannot do another rollover you can still do a direct transfer of any of the funds in either Roth account to another Roth IRA. A Roth recharacterization can also be done from either account because it must be done as a direct transfer.

A rollover from a Roth 401(k) (or similar employer Roth plan) does not count. If the check from the employer is made payable to the plan participant, the 60-day rollover period does still apply but there is no once-per-12-month limit.

Funds that are not eligible for rollover, but are nevertheless rolled over, become excess contributions in the receiving account. Excess contributions are subject to a penalty of 6% per year for every year they remain in the account. The penalty is reported on Form 5329, which is filed with the account owner’s federal income tax return. If the form is not filed, the statute of limitations does not start to run on the penalty.

All of the above limits and potential problems can be eliminated by doing direct transfers. Instead of having a check made out to the individual, it should be made out to the receiving institution for benefit of the individual’s Roth IRA account. Then there is no 60 days to worry about, no once-per-year rule, and no worries about excess contributions.

IRS can allow extra time to complete a rollover in limited situations. The catch - the fees you have to pay. The extension can only be granted by requesting a private letter ruling. The IRS fees range from $500 to $3,000 depending on the amount of the rollover. In addition, you have to pay someone to prepare the ruling request. There is no guarantee that IRS will grant any request. If the request is denied, there are no refunds.

- By Beverly DeVeny and Jared Trexler

One IRA Rollover Per Year Per IRA Account

Many IRA owners do not realize that they can only do one IRA-to-IRA or Roth-to-Roth rollover, per IRA or Roth IRA account, per year.

If you have more than one IRA or Roth account, you can do one rollover from each account. So you could do five rollovers when you have five IRAs. If you do a rollover on April 20th, you cannot do another rollover from that account until the next April 20th.

The funds you roll over can go back into the account they came out of or into any other account you may have or into a new account you establish. Once an account receives a rollover, it too cannot do a rollover distribution for one year. However, it can receive more than one rollover during a year.

Once a rollover is done from an IRA or Roth account, any subsequent distributions cannot be rolled over to any other IRA or Roth account (Roth conversions are an exception to this rule). If a rollover is done, you have an excess contribution in the receiving IRA or Roth account.

Excess contributions can be corrected without a penalty if they are properly removed (following the procedures for withdrawing excess contributions) by October 15th of the year after the contribution is made. When they are not timely corrected, a penalty of 6% per year applies for every year the excess contribution amount remains in the account. The penalty is reported on Form 5329 which is treated as a standalone return. When the form is not filed, the statute of limitations does not start to run. So this penalty goes on forever, even to your beneficiaries. And, other penalties and interest can be assessed by IRS.

If you think you have violated the one-rollover-per-year-per-account rule, please talk to a specialist in this area as soon as possible to limit the taxes and penalties you will have to pay.

It is always better to do a direct transfer of funds from one IRA or Roth account to another account. You can do as many transfers as you want in a year. There is no possibility of having an excess contribution.

-By Beverly DeVeny and Jared Trexler

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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.