IRA Rollovers: Rules and How to Do One

An Individual Retirement Arrangement (IRA) rollover involves moving funds from a retirement account, such as a 401(k) from a previous employer, into an IRA. This process maintains the tax-advantaged status of the funds, allowing for continued tax-deferred or tax-free growth. A rollover gives you control of your retirement assets, often providing a wider range of investment choices than an employer-sponsored plan. Consolidating funds into a single IRA can also simplify the management of your retirement savings.

Types of IRA Rollovers

One type of rollover moves funds from an employer-sponsored retirement plan, like a 401(k), 403(b), or governmental 457(b) plan, into an IRA. When you leave a job, you can transfer the balance of your old workplace plan into a new or existing Traditional or Roth IRA.

Another type is an IRA-to-IRA rollover, where you transfer funds between two similar types of IRAs, such as from one Traditional IRA to another. This transaction is distinct from a trustee-to-trustee transfer, which is not reported to the IRS and can be done more frequently.

A Roth conversion is a rollover that moves pre-tax retirement funds from a Traditional IRA or 401(k) into a post-tax Roth IRA. This action creates a taxable event, meaning you will owe income tax on the converted amount.

The rules for inherited IRA rollovers differ for spousal and non-spousal beneficiaries. A surviving spouse has more flexibility and can often roll the inherited assets into their own IRA, while non-spousal beneficiaries must use a specially designated inherited IRA.

Key Rollover Rules and Tax Implications

An important regulation is the 60-day rollover rule, which applies to indirect rollovers where you receive a check for the distribution. You have 60 days from the date you receive the funds to deposit them into another eligible retirement account. If you miss this deadline, the distribution is considered a taxable withdrawal and may be subject to a 10% early withdrawal penalty if you are under age 59½.

The IRS may waive the 60-day requirement if the deadline was missed due to circumstances beyond your reasonable control, such as a financial institution error or a serious illness.

The one-rollover-per-year rule limits you to one indirect rollover between IRAs in any 12-month period. This limitation does not apply to rollovers from an employer plan to an IRA, nor does it apply to trustee-to-trustee transfers between IRAs.

When you receive an indirect rollover distribution from an employer-sponsored plan, the administrator must withhold 20% for federal income taxes. To complete a full rollover and avoid taxes on the withheld amount, you must deposit the entire original distribution amount, making up the 20% difference with your own funds. The pro-rata rule applies during a Roth conversion if you have both pre-tax and post-tax contributions in your Traditional IRAs. The converted amount is considered a mix of both fund types, and you will owe income tax on the pre-tax portion.

Information and Decisions for Your Rollover

Before a rollover, gather recent account statements from your old plan, the administrator’s contact information, and the account number for your new IRA. You will need to decide whether to perform a direct or an indirect rollover. In a direct rollover, the funds are transferred directly from your old plan to the new IRA provider. An indirect rollover involves receiving a check for the funds, which you must then deposit into the new account within 60 days.

You will also need to decide on the destination for your funds. You can roll your retirement savings into a Traditional IRA, which does not have immediate tax consequences. Alternatively, you can choose to roll the funds into a Roth IRA, which would be a taxable conversion but allows for tax-free withdrawals in retirement.

The Rollover Process Step-by-Step

The first step in the rollover process is to open a new IRA with a financial institution of your choice. Ensure the new account is established before you initiate the transfer to avoid delays.

• Contact the administrator of your current retirement plan to request the necessary distribution paperwork.
• Complete the distribution request form from your old plan and the account opening documents for your new IRA.
• Submit the paperwork by mail or through an online portal, following the instructions from both institutions.
• Confirm that the transfer has been completed by verifying the funds have been deposited into your new IRA.