IRA expert Ed Slott released a guide on how to avoid the tax trap that often befalls individuals who invest in individual retirement accounts (IRAs). In an Investment News report, Slott advised the public to use trustee-to-trustee transfer services when doing IRA rollovers.
Rollover IRA, or the act of relocating funds to another IRA, is only allowed once a year. However, many account holders violate the rule. Disregarding the funds rollover rule results in clients losing their funds through tax distributions and early distributions penalties.
According to Slott, the once-a-year rule for IRA funds is only implemented for indirect rollovers. Investopedia said that an indirect type of transfer occurs when the employee personally takes the funds and deposits the amount into another eligible retirement plan. The transfer should be done within 60 days.
Slott clarifies that indirect rollover is distinct from a direct rollover in which the assets are transferred from the current plan straight to a new one.
With the current rule, owners can only indirectly transfer funds at only one instance per year. However, many IRA investors forget that the term “year” refers to a fiscal year and not a calendar one.
This means that under this rule, a new year does not start on January 1, but 365 days after the assets are withdrawn. Slott emphasized that an individual who withdraws their assets on December 20, 2019, will not be able to do another indirect rollover until December 20, 2020.
In light of this tax trap, Slott said that individuals who need to do rollovers should opt for direct transfers.
The expert also said that the current tax code does not say anything about mistakes made by holders. Moreover, the Internal Revenue Service (IRS) is also not given the power to grant relief.