Taking Care of Mom and Dad: Consolidating Accounts

If your parents have a traditional, defined benefit pension, you don't need to worry too much about where the money is. But, if they have money in different defined contribution accounts, you may want to help them organize this money. IRA rules permit you to transfer, tax free, assets (money, investments or other property) from other retirement programs to a traditional IRA.

Generally, a rollover is a tax-free distribution to your parents of cash or other assets from one retirement plan that they'd contributed to another retirement plan. The contribution to the second retirement plan is called a "rollover contribution."

In most cases, your parents have to make the rollover contribution by the 60th day after the day they receive money from a defined-contribution plan. However, the IRS may waive the 60-day requirement where the failure to do so would "be against equity or good conscience, such as in the event of a casualty, disaster or other event beyond [a person's] reasonable control." If your parents didn't roll their money over in time because they're starting to have problems managing their affairs, you may be able to appeal on these terms.

If your parents are consolidating accounts, it's important to keep things moving. Amounts not rolled over within the 60day period do not qualify for tax-free rollover treatment. These monies are treated as taxable income after 60 days. In these situations, your parents (depending on their ages) may also have to pay a 10 percent additional tax on early withdrawals.

A key point: Your parents cannot deduct the amounts that they reinvest as part of a rollover. In most cases, they've already deducted this amount when they put it into the first account.

If your parents roll over any part of a distribution from a traditional IRA, they can't -- within a one-year period -- make a tax-free rollover of any later distribution from that original IRA. They also can't make a tax-free rollover of any amount distributed, within the same one-year period, from the IRA into which they made the rollover. But they can rollover two (or more) IRAs into a third.

If your dad has two traditional IRAs, IRA-1 and IRA-2, and he makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3), he can also make a tax-free rollover of a distribution from IRA-2 (or any others) into IRA-3 within one year of the distribution from IRA-1. These can both be tax-free rollovers because he has not received more than one distribution from either IRA within one year. However, he can't -- within the one-year period -- make a tax-free rollover of any distribution from IRA-3 into another IRA.

If your parents withdraw assets from a traditional IRA, they can roll over part of the withdrawal tax free and keep the rest of it. The amount they keep will generally be taxable (except for the part that is a return of after-tax contributions) and may be subject to the 10 percent tax on premature distributions.

Before making a rollover distribution, the administrator of a qualified employer plan must provide your parents with a written explanation -- often called a rollover notice. It must tell your parents about:

• their right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan;
• the requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan;
• the nontaxability of any part of the distribution that they roll over to a traditional IRA or another eligible retirement plan within 60 days after they receive the distribution; and
• other qualified employer plan rules, if they apply, including those for lump-sum distributions, alternate payees and cash or deferred arrangements.

Because restrictions and tax consequences vary, it will be up to your parents to compare the plans to decide whether or not they want to make the rollover.

A caveat: If your parents have less than $5,000 in an defined contribution account (or the distribution due is less than $5,000), the plan can simply cut them a check and force them to deal with the tax issues related to the money.