Three Basic IRA Rules That Must Be Understood
With so many rules to follow, the SECURE Act and subsequent regulations, all the different types of beneficiaries, payout options, rollover rules, and other nuances, it is no surprise that some of the foundational IRA guidelines can be misunderstood. Here are three basic IRA rules that all IRA owners and financial professionals must be aware of:
1. IRA Contributions: Cash Only
The misunderstanding of this rule came across our desk just recently. An advisor was trying to make Roth IRA contributions in the form of stock and mutual funds. His idea was to transfer enough shares of stock and/or mutual funds from his client’s non-qualified brokerage account into a Roth IRA to meet the annual Roth IRA contribution limits ($7,000 plus $1,000 age-50-and-older catch-up in 2025; $7,500 plus $1,100 in 2026). His thought was that the existing earnings on the shares could be transferred into a tax-free account, or the custodian would report the existing earnings as taxable prior to the transfer into the Roth IRA. Neither assumption was accurate. Traditional and Roth IRA contributions must be made in the form of cash. Can you imagine the anarchy and price manipulation if people were allowed to transfer items other than cash into an IRA as a contribution?
2. Same Property Rule
This rule dictates that if a person intends to do a 60-day rollover from one IRA to another, the same property distributed must be rolled over. If you withdraw stock, you must roll over the same stock (although not necessarily the same shares). If you withdraw cash, you must roll over cash. For clarification, we like to say if you withdraw blueberries, you must roll over blueberries. In PLR 201506016, an IRA owner tried to withdraw cash, buy an investment property, and then roll that real estate back into his IRA within 60 days. This ordeal was monitored by the IRA owner’s team of professionals that included a CPA, lawyer, financial advisor, and realtor. Nobody knew the rules. Nobody dissuaded the IRA owner from pursuing this transaction. Ultimately, the rollover attempt was denied by the IRS due to the Same Property Rule. (Note that there is one exception to the Same Property Rule. A person could withdraw stock from a work plan like a 401(k), sell the shares, and roll over the cash proceeds.)
3. One-Rollover-Per-Year Rule
Speaking of 60-day rollovers, a person is allowed only one IRA-to-IRA or Roth-IRA-to-Roth-IRA rollover per year. By “per year,” we mean every rolling 12 months, not a calendar year. Where people get sideways with the One-Rollover-Per-Year rule is failing to understand where the rule does NOT apply. It does not apply to Roth conversions. It does not apply to IRA-to-plan rollovers (i.e., “reverse rollovers”), and it does not apply to plan-to-IRA rollovers. This means a 401(k) owner could chop up a plan and make multiple plan-to-IRA rollovers during the year (assuming the plan allows for multiple rollover transactions).
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
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