Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Same Property Rule

What it is:

The same property rule is an IRS rule stating that money taken from an Individual Retirement Account must be placed into a similar type of account if the account holder is less than 59.5 years old.

How it works (Example):

Let's say John Doe has an IRA that he opened when he was 15. He is now 45 and wants to consolidate the money with another IRA he opened a few years ago. The IRS's same property rule allows him to do this, because he is moving money from an IRA to an IRA. If he were moving the money from an IRA to a trading account or a Certificate of Deposit, for example, he would be violating the same property rule.

If the original IRA held, say, just shares of Company XYZ stock and in moving the funds decides to sell the shares and put just the cash proceeds in the new IRA, he would also be violating the same property rule because he did not move the shares from the original IRA to the new IRA.

Why it Matters:

Violating the same property rule isn't illegal, it just generates a huge tax penalty if the accountholder is less than 59.5 years old (that's the age at which you can withdraw IRA funds for use in retirement). Specifically, any IRA monies that violate the same property rule are subject to ordinary income tax plus a 10% penalty.