IRA Rollover Rules

It’s important to understand your IRA rollover rules before you rollover your retirement plan. Here’s a look.

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When you move funds from one type of retirement account – like a 401(k), 403(b), or IRA– into an IRA, the process is known as an IRA rollover. You might rollover funds into an IRA after you’ve terminated employment with a company and have started working for another company. An IRA rollover lets you keep flexibility in managing your account or lets you simplify your retirement accounts. And while there are IRA contribution limits on how much you can contribute directly to an IRA each year, this limit doesn’t apply to IRA rollovers.

Mandatory Withholding

IRS rules require your plan administrator to withhold 20% of your rollover when you take direct distribution. If have $20,000 in your retirement account, your distribution check would only be $16,000 and $4,000 is withheld for the IRS. And even though part of your money has been withheld, you’re still required to rollover the full $20,000 or else you’ll face an early withdrawal and tax penalty. That means you must come up with the other $4,000 or pay a penalty.

60 Days to Rollover

You have 60 days to complete your IRA rollover starting from the day you receive funds from your previous IRA account. If you don’t rollover your IRA funds within those 60 days, the IRS will treat the withdrawal as a distribution and require you to pay taxes and penalty on the amount you withdrew. You’ll have to include the distribution as income on your next tax return and be subject to tax on that amount based on your tax bracket percentage. You’ll also face a 10% early withdrawal penalty if you weren’t age 59 ½ when you took the distribution.

If you deposit the funds after the 60-day cutoff, it’s treated as a regular contribution and subject to regular IRA contribution limits. You may get an automatic waiver if the bank made an error in the deposit. You can apply for a waiver if you can’t make the deposit because of a death, disability, hospitalization, incarceration, or restrictions from another country.

For the next year, you can’t make another tax-free rollover to or from any IRAs involved in this IRA rollover transaction. For example, let’s say you have IRA A, IRA B, and IRA C and you rollover IRA A into IRA B. For the next twelve months, you’re not allowed to rollover IRA funds to or from IRA B. You can, however, make rollovers to or from IRA C. There is an exception to this IRA rollover rule: if you made a Roth conversion where you rolled-over a traditional IRA into a Roth IRA. Note that a transfer from qualified employer plan is treated
as a rollover even if the funds were sent directly from the old plan administrator to the new one.

More IRA Rollover Rules

Required minimum distributions (RMD), which are required of IRA owners after age 70 ½, cannot be rolled-over. If you plan to rollover IRA funds in the same year you take a RMD, you should withdraw the RMD before you withdraw the rollover funds.

When you rollover an IRA, you must rollover assets the way they were received. For example, you withdraw stock, sell it, and then rollover the cash from the sale. Any asset changes must be made after the IRA rollover is complete.

Most types of retirement plans can be rolled over into a traditional IRA. However, a Roth IRA can only be rolled over into another Roth IRA. If you rollover a plan into a Roth IRA, you must include the rollover in your taxable income since only post-tax contributions can be made to a Roth IRA. While a SIMPLE IRA can rollover to other types of plans, SIMPLE IRA rules can only accept rollovers from another SIMPLE IRA.

IRA Direct Transfer

You may be able to avoid many of the IRA rollover rules by doing an IRA transfer instead. With a transfer, the retirement funds are transferred directly to your new broker either via an electronic transfer or a paper check that’s written out to the new broker. One of the benefits of doing a transfer versus a rollover is that you can transfer the funds again, without penalty, if it’s ever necessary. This is a great IRA or 401k rollover option allowing you to avoid mandatory withholding. You can even transfer funds when rollover isn’t an option.

 

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