Watch Out for the Once-Per-Year Rollover Rule 2025
Why is it so important to know how the “once-per-year rollover rule” works? Well, that’s because trouble with the once-per year rule is the kind of trouble no one wants! If you violate this rule, you are looking at some serious tax consequences. Here is what you need to know about this rule that can cause big problems for those who do not know all its details and pitfalls.
One Rollover a Year for An IRA Owner
If an IRA owner for whatever reason elects not to do a direct transfer but instead chooses to move her money by 60-day rollover, there will usually be no escaping the once-per-year rollover rule. The rule says that an IRA owner cannot roll over an IRA distribution that is received within a 365-day period of a prior distribution that was rolled over.
Traditional and Roth IRAs are combined for purposes of the once-per-year rule. So, for example, a distribution and subsequent rollover between your Roth IRAs will prevent another rollover of a distribution from your traditional IRA received within one year of the Roth IRA distribution. The bottom line is that an IRA-to-IRA (or Roth IRA-to-Roth IRA) 60-day rollover may not be done if you received a prior distribution within the last year (365 days) that you also rolled over.
The once-per-year rollover rule does NOT apply to rollovers between plans and IRAs or Roth IRA conversions.
Fatal Error
A mistake with the once-per-year rollover rule can result in the loss of your retirement savings. It is a fatal error with no remedy.
If you take a distribution with the intent of rolling over and discover that you are ineligible to roll over the funds due to the rule, that distribution will be taxable to you. You will no longer have an IRA and will likely have a tax bill instead. The distribution will also be subject to the 10% early distribution penalty if you are under age 59½. If you go ahead and deposit the funds anyway, you will have an excess IRA contribution complete with all the penalties and headaches that go with it.
What about the IRS? Well, the IRS will not be able to grant relief. This is because by law the IRS has no authority to waive this rule. The self-certification procedures allowing for relief when the 60-day deadline is missed do not apply to violations of the once-per-year rollover rule. A private letter ruling (PLR) request won’t work either.
Do Direct Transfers Between Your IRAs
Why chance it? A good place to start is by avoiding 60-day day rollovers whenever possible. If there is no 60-day rollover, then there is no once-per year rollover rule to worry about. How then can you move your retirement funds? The best advice is to directly transfer the funds from one retirement account to another rather than taking a distribution payable to yourself and then rolling it over to another retirement account. You can do as many transfers between IRAs annually as you want. There are no limits for you to worry about here.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.