Same Property Rule

The same property rule requires that a rollover transaction between retirement accounts retain the same asset type. Violations of the rule trigger premature withdrawal penalties.

The same property rule applies to rollover transactions between retirement accounts, in which an investor transfers assets from one eligible retirement plan to another. Any time an investor takes a distribution from a retirement plan, the IRS must determine how to treat that income for tax purposes. Rollover transactions typically avoid tax consequences because any distributions get reinvested in a qualified retirement account. When investors choose to execute a rollover themselves, the IRS generally gives them 60 days to do so without tax consequences.

The 60-day requirement simply allows an investor enough time to set up a new retirement account and execute a transfer of holdings. To ensure that timing does not create a loophole during which an investor could use the retirement fund distributions as a short-term loan, the IRS places a further requirement on rollover transfers that requires investors to use the same property they receive from the old account to fund the new account. In other words, an investor who receives a cash distribution from a retirement account must make a cash contribution to the new retirement account. If an investor withdraws stock assets from a retirement account, the investor must reinvest the same stocks in the new account to avoid taxation.

Premature withdrawal penalties exist to encourage investors to hold money in retirement accounts until they reach at least age 59.5. Suppose Paul, a 45-year-old investor, decided to use the rollover window as a loophole to execute a set of trades with his IRA. He takes a distribution from the account and uses it to purchase a hot stock, which ends up appreciating nicely. After a month, he places a portion of the shares equal to the value of his distribution into a new IRA in order to defer taxes. Because he has taken a distribution and made an equal investment within 60 days, the transaction has the appearance of a rollover. Since he received a cash distribution and funded the new IRA with stock, however, the same property rule applies, making the distribution subject to income tax plus early withdrawal penalties.

Investors can avoid issues with the same property rule by keeping rollover transactions as simple as possible. Direct rollovers and trustee-to-trustee transfers allow investors to move money from one retirement account to another without taking a distribution. These methods avoid the 60-day rule and the same property rule by keeping the retirement holdings under the control of financial institutions at all times.