By: A.J. Cook


Is your Individual Retirement Account mobile? You bet it is - but be careful.

You can transfer IRA funds from one financial institution to another and continue postponing the tax and you can even transfer distributions from a qualified retirement plan into an IRA and delay the tax. You don't, however, get a deduction for the contribution to the IRA.

To be tax and penalty free the transfer must be completed in 60 days or less. And you are allowed only one switch in any 12 months. There are some other points to consider, like don't mix rollover funds with funds in a nonrollover IRA. Also, special rules apply to a rollover from a traditional IRA to the new Roth IRA.

Few excuses valid for late rollover.

The Internal Revenue Service is strict about how quickly a taxpayer must get things rolling. Sad, even pathetic, tales of theft, bank errors, poor advice and untimely vacations have not moved the IRS from its position that transferred funds must be in place by 60 days. It has consistently ruled that it can neither grant extensions nor waive the 60-day period. But recently, it made one exception.

A taxpayer's employer mailed his pension check to the wrong address. It didn't reach the retiree for 10 months. The taxpayer put the check into an IRA 30 days later. Fortunately and surprisingly, the IRS ruled the taxpayer made it under the deadline because he completed the rollover within 60 days of receiving the money.

One day rollover counts as a rollover.

Marshall H. Martin from Sulpher Springs, Texas, directed E.F. Hutton to pay him all his IRA funds. Hutton gave him a check for $111,616. On the same day Martin used the check to establish a new IRA at Merrill Lynch. In less than 12 months, he withdrew the assets in his new account and redeposited them with Lynch within 60 days.

The IRS said the second withdrawal was taxable. He first withdrew from Hutton and put into Lynch; that was one rollover. He then withdrew from and redeposited with Lynch; that was the forbidden second within 12 months.

What should he have done? He should have told Hutton to transfer the funds directly to Lynch. There are no limits on the number of trustee to trustee transfers.

Distributions from a retirement plan.

An IRA may be a good place to park funds when you move from one employer to another. Later when you get a new job and if the new employer's retirement plan permits, the funds can be rolled over to it. But think twice before you rollover from a retirement plan. You may have an opportunity to choose between a reduced tax now and postponing the tax with a rollover. Some distributions from retirement plans receive a tax advantage not available to distributions from IRAs. See a tax professional or the section on "Lump-Sum Distributions" in IRS publication 575.

One way to borrow money.

Borrowing money from an IRA usually results in a stiff tax bill. Now the IRS says it can be done tax and penalty free, if done right. For example: A person withdrew $1500 and spent it. Within 60 days, he deposited $1500 in the same IRA. Nearly a year and a half later, he did the same thing. The IRS said that was acceptable as long as he didn't borrow longer than 60 days and didn't do it more often than once every 12 months.

The Moral:  Rolling over an IRA is not as simple as rolling off a log.