By Ian Berger, JD
IRA Analyst
Many of you are probably aware of the 60-day rollover deadline and the once-per-year rollover rule. But there’s a third IRA rollover restriction you may be less familiar with: the “same-property rule.”
The same-property rule is the Rodney Dangerfield of rollover rules. It gets no respect. That’s because it comes into play much less often than the other two rules. However, it should not be overlooked. As with the other IRA rollover rules, failing to comply with the same-property rule can have serious tax consequences.
What does the same-property rule require? It requires that if property is received in an IRA distribution, the very same property must be rolled over. If cash is received, cash must be rolled over. If shares of stock are received, those same shares of stock (notthe same value of the stock) must be rolled over. It’s not enough to substitute another asset of equal value to the property received and roll over that other asset.
Example: Ella owns 1,000 shares of Choosin’ Texas Company stock in her IRA, valued at $150,000 ($150 per share). Ella requests that those shares be distributed in-kind from her IRA to her non-qualified brokerage account so she can roll them over to an IRA with another custodian within 60 days. However, by the time she does the rollover, the Choosin’ Texas share price has dropped to $100. To avoid a violation of the same-property rule, Ella must roll over the same 1,000 shares, even though their value has fallen to $100,000.
When does the same-property rule apply? It applies to the following types of 60-day rollovers:
- Traditional IRA-to-traditional IRA;
- Roth IRA-to-Roth IRA;
- Traditional IRA-to-plan (“reverse rollovers”), if allowed by the plan; and
- Roth conversions.
What about plan-to-IRA rollovers? The same-property rule does apply, but there’s an exception: If you receive property from a plan, you can either roll over the same property to the IRA or sell the property and roll over the proceeds. There must be an actual sale. You cannot elect to keep the property and roll over cash.
What happens if I violate the rule? You’ll definitely have some tax headaches. Since the IRA distribution was not eligible for rollover, it’ll become taxable and possibly subject to the 10% early distribution penalty. And since the rollover was invalid, it’s treated as an excess contribution that’s subject to a 6% annual penalty unless timely corrected. And don’t look to the IRS for help. The IRS has no authority to excuse same-property rule violations.
How can these complications be avoided? It’s simple: Don’t do 60-day rollovers. Instead, do direct transfers. The same-property restriction does not apply to direct transfers. (Extra bonus: Direct transfers also avoid the other two rollover rules – the 60-day deadline and the once-per-year rule.)
If you have technical questions you would like to have answered, be sure to submit them to [email protected], to be answered on an upcoming Slott Report Mailbag, published every Thursday.