Partial IRA Rollover: Rules, Steps, and Tax Reporting

A partial IRA rollover involves moving a portion of your Individual Retirement Arrangement funds to another eligible retirement account. This strategy is often used to consolidate various retirement accounts, gain access to a wider array of investment options, or to execute specific financial plans. For instance, an individual might roll over a part of their traditional IRA to a new account with lower fees or a better selection of mutual funds. Others may use a partial rollover as a step in a backdoor Roth conversion, a method to fund a Roth IRA despite income limitations.

The core concept is selectively transferring assets while leaving the remainder in the original account. This allows for flexibility in managing retirement savings without committing to a full account transfer.

Governing Rules and Limitations

The two primary methods for rollovers are direct and indirect. In a direct rollover, the funds are transferred electronically from one financial institution to another without the account holder ever taking possession of the money. This method is straightforward and avoids potential tax complications.

For an indirect rollover, the financial institution sends a check for the distributed amount directly to the account holder. The individual then has 60 days to deposit those funds into a new, eligible retirement account. Failing to deposit the entire amount within this window results in the funds being treated as a taxable distribution, potentially subject to a 10% early withdrawal penalty if under age 59½.

A restriction on indirect rollovers is the one-rollover-per-year rule. This rule limits an individual to one indirect IRA-to-IRA rollover across all of their IRAs within any 365-day period. This limitation does not apply to direct, trustee-to-trustee transfers, nor does it apply to conversions from a traditional IRA to a Roth IRA.

Required Minimum Distributions (RMDs) cannot be rolled over. An individual who has reached the age where RMDs are mandated must first satisfy their annual RMD for that specific IRA before any other funds from that account can be moved via a rollover. The RMD amount is considered a taxable distribution and is ineligible for rollover treatment.

Applying the Pro-Rata Rule

When an individual holds both pre-tax and after-tax (nondeductible) funds within their IRAs, a partial rollover or conversion triggers the pro-rata rule. The IRS does not permit an individual to selectively roll over only the pre-tax or only the after-tax money. Instead, any distribution is considered to contain a proportional mix of both types of funds.

To correctly apply the pro-rata rule, the IRS requires the aggregation of all of an individual’s traditional, SEP, and SIMPLE IRAs. These are treated as a single, large IRA for the purpose of the calculation. Roth IRAs are excluded from this aggregation.

The first step is to determine the total value of all aggregated IRAs as of December 31 of the year the distribution is made. This includes the amount of the distribution itself. The second step is to identify the total basis, which is the sum of all nondeductible, after-tax contributions made to those IRAs. This basis represents the portion of the IRA funds that have already been taxed.

With these two figures, the non-taxable percentage of the total IRA value can be calculated by dividing the total basis by the total year-end value of all IRAs. This percentage is then applied to the amount of the partial rollover. For example, if the total IRA value is $100,000 and the basis is $20,000, then 20% of the funds are non-taxable. If that individual executes a $50,000 partial rollover, $10,000 would be considered a non-taxable return of basis, while the remaining $40,000 would be taxable income.

Executing a Partial IRA Rollover

For a direct rollover, the process is initiated with the receiving financial institution. The individual will need to open the new IRA account first and then complete a transfer initiation form, which can be done online or on paper. This form requires providing specific details about the existing IRA, including the name of the current custodian and the account number. Once the transfer form is submitted to the new institution, it will work directly with the old institution to move the specified partial amount.

For an indirect rollover, the process begins with the current IRA custodian. The account holder must contact this institution and request a distribution for the specific partial dollar amount they wish to roll over. The institution will then issue a check payable to the account holder. You are then responsible for depositing these funds into a new retirement account within the 60-day timeframe.

Tax Filing and Reporting

The financial institutions involved in a partial rollover will issue tax forms early in the following year. The distributing institution sends Form 1099-R, which reports the gross distribution amount. The receiving institution sends Form 5498, which confirms the amount received as a rollover contribution.

When filing the annual federal tax return, the transaction must be reported on Form 1040. The total distribution amount shown on Form 1099-R is entered on the line for IRA distributions. On the line for the taxable amount, the filer enters only the portion of the distribution that is actually taxable. If the entire amount was properly rolled over and no funds were withheld, this amount would be zero, and it is standard practice to write “ROLLOVER” in the margin next to the line.

If the rollover involved after-tax funds and the pro-rata rule was applied, filing Form 8606, “Nondeductible IRAs,” is necessary. This form is used to calculate the taxable portion of the distribution according to the pro-rata rule and to track the individual’s total basis in their traditional IRAs.