Most people feel doing an IRA Rollover or distribution is simple. Instead there are thousands of pages of rules and regulations. Here is an excerpt from one such case.
A taxpayer wanted to buy an investment property with the proceeds from two old IRAs and place it in his self-directed IRA. Even with his financial team in place, the attempted rollover failed three different IRA rules:
• It violated the once-per-year IRA rollover rule.
• It violated the same-property rollover rule.
• It missed the 60-day rollover deadline.
How do these mistakes happen, and how can they be prevented?
This case is dated from Feb. 1 to Feb. 6, 2013, when the taxpayer took distributions from two former IRA that he used to buy the investment property. This was his first failure; because of the once-per-year rollover rule, only one of the IRAs was eligible for rollover.
He went on to make matters worse by using the money from his IRA distributions to buy the investment property outside of his IRA.
He intended to put the property in the IRA, completing what he thought would be a 60-day rollover. But his method violated the same-property rollover rule, which holds that tax payers must roll over the same property that was distributed. You cannot distribute cash from the IRA, and then roll over real estate back to an IRA.
The taxpayer also missed the 60-day rollover because neither he nor his alleged expert team realized that his investment property had not yet been placed into his IRA.
But again, timing wasn’t the only issue. Even if this taxpayer had moved the investment property back into an IRA within the 60-day window, it still would not have been a valid rollover.
In fact, had he completed such a transaction, the tax consequences of doing so would have been even more severe than what he already faces.
The reason stems from that same- property rule. For IRA-to-IRA rollovers, including those going from Roth IRAs to Roth IRAs, the property distributed from the original account must be the same property contributed to the receiving account. These rules also apply to SIMPLE and SEP IRAs.
If cash is distributed from an IRA, as in this case, then cash must be rolled over within 60 days.
The same-property rule extends beyond cash. If a person takes an IRA distribution of property other than cash, the same property must be put back into a retirement account in a timely manner if the person wants to complete a valid rollover.
Individuals also cannot receive an IRA distribution of 100 shares of ABC stock worth $20,000 and roll over $20,000 of XYZ stock — because it’s not the same property that was distributed from the IRA.
There is an exception to the same-property rule for rollovers distributed from a company retirement plan, such as a 401(k). In this case, recipients have a choice: They can either roll over the same property to an IRA or they can sell the property distributed from the plan and roll over the cash proceeds from the sale.
Get help when doing anything with a Government Sponsored Qualified Plan.