Confusion between what is a rollover and what is a transfer is a common occurrence. And, the related official guidance and tax laws sometimes lend to the confusion as they sometimes use the word ‘transfer’ when referring to direct-rollovers , and other reportable transactions where the assets are moved directly between two financial institutions or two retirement accounts. Financial institutions typically use the term rollover, when referring to distributions (reportable on IRS Form 1099-R) that are credited to eligible retirement accounts as rollover contributions, and they use the term ‘transfer’ when referring to non-reportable movement of assets between retirement accounts.
The person who told you about the once-per 12-month rule was likely referring to the rule that applies to distributions and rollover contributions that occur between traditional IRAs, between traditional and SEP IRAs
, between SIMPLE IRAs
, betweenRoth IRAs
, and from SIMPLE IRAs to traditional IRAs or SEP IRAs. Under this rule, an individual who rollovers a distribution from an IRA may generally not rollover another distribution from that IRA during the next 12 months. The 12-month period begins on the day the IRA owner receives the distribution. [IRC Sec. 408(d)(3)(B)]. Additional information about limitations on rollovers between IRAs is available in IRS Publication 590, available at www.irs.gov.
Movement of assets from your qualified plan to your IRA is always a distribution from the qualified plan
and a rollover contribution to the IRA. This rollover can be a direct rollover, or an indirect rollover
which is subject to the 60-day rule
. A rollover from your 401(k), any other qualified plan account, 403(b) account or 457(b) plan to your IRA is not subject to the once per 12-month (1-year) rule, and it does not affect the once per 12-month rule for rollover contributions between your IRAs.
For practical purposes, a transfer is a non-reportable transaction where the assets move directly between the retirement accounts. A transfer usually occurs between accounts of the same type. For instance:
When communicating with your financial institution, use of the correct terminology is of the utmost importance. You do not want to say you are requesting a rollover, when you really want a transfer. Otherwise, you could find yourself with reportable transactions and tax forms to file, and possibly an ineligible transaction resulting in taxation and penalties. An example of an ineligible transaction (that could occur) is where you rollover assets from the same IRA twice during a 12-month period. Because of the 12-month limitation, your second rollover contribution would be ineligible and create an excess contribution
in the receiving IRA. You would be required to include the second rollover amount in your income for the year, and failure to remove the ineligible rollover from the receiving IRA by certain deadline would result in you owing the IRS a 6-percent excise tax
and possibly cause double taxation of the amount.