What Is an IRA Distribution Rollover?

An Individual Retirement Arrangement (IRA) distribution rollover moves funds from one retirement account to another without taxes or penalties, maintaining the savings’ tax-advantaged status. This process is common when changing jobs, retiring, or consolidating retirement accounts. A rollover allows you to transfer assets from an employer-sponsored plan, like a 401(k), into an IRA that you directly control. This can provide a wider array of investment choices and potentially lower administrative fees. Properly executing a rollover ensures your accumulated retirement assets continue to grow in a tax-advantaged environment, keeping your long-term savings goals on track.

Types of IRA Rollovers

The two primary methods for moving retirement funds are direct and indirect rollovers. A direct rollover is a transfer of assets managed entirely by financial institutions. The administrator of your old retirement plan sends the funds directly to the institution holding your new IRA. You do not personally receive the money during this process, which makes it a straightforward option. This trustee-to-trustee transfer is often preferred because it eliminates the risk of triggering tax consequences, as there is no mandatory tax withholding or deadline to meet.

An indirect rollover occurs when you take temporary possession of the funds. Your former plan administrator sends you a check, and you have a specific period to deposit the money into a new IRA. When moving funds from an employer plan, the administrator is required to withhold 20% for federal taxes. To complete a full rollover, you must deposit the entire original balance, using personal funds to cover the 20% that was withheld. You can reclaim the withheld amount when you file your annual income tax return, but failure to deposit the full amount results in the shortfall being treated as a taxable distribution.

Key Rollover Rules and Limitations

One of the regulations governing indirect rollovers is the 60-day rule. This Internal Revenue Service (IRS) rule mandates that you must deposit the distributed funds into a new eligible retirement account within 60 days of receiving them. The 60-day clock starts on the day you receive the payment from your old plan’s administrator.

If you fail to complete the rollover within the 60-day window, the IRS will treat the entire distribution as a taxable event. The funds will be included in your gross income for that year and taxed at your ordinary income tax rate. If you are under the age of 59½, you will also face an additional 10% early withdrawal penalty on the amount.

Another limitation is the once-per-year rule, which applies specifically to IRA-to-IRA indirect rollovers. This rule limits you to making only one such rollover within any 12-month period, regardless of how many IRAs you own. This restriction does not apply to direct, trustee-to-trustee transfers between IRAs or to rollovers from employer-sponsored plans like a 401(k) into an IRA. It also does not affect conversions from a Traditional IRA to a Roth IRA.

Certain types of distributions from retirement accounts are considered non-rollable. Required Minimum Distributions (RMDs), which are mandatory withdrawals you must begin taking from most retirement accounts once you reach age 73, cannot be rolled over. Other non-rollable funds include hardship distributions and certain periodic payments scheduled over your life expectancy. You should confirm with your plan administrator whether a specific distribution is eligible for a rollover before you begin.

Information and Decisions for Your Rollover

Before initiating a rollover, you must gather specific information and make several decisions to ensure a smooth transaction.

Information Needed

You will need the account number and contact information for both the distributing account and the receiving IRA. This includes the name, address, and phone number of both financial institutions. Be prepared to provide personal identification details, such as your Social Security number and date of birth, to verify your identity.

Key Decisions

A primary decision is choosing between a direct and an indirect rollover. A direct rollover is simpler and avoids tax withholding and the 60-day deadline, while an indirect rollover offers temporary access to your funds. You must also select a financial institution to host your new IRA by comparing investment options, fees, and services. Finally, you need to decide on the type of IRA, such as rolling a traditional 401(k) to a Traditional IRA to maintain its tax-deferred status or converting it to a Roth IRA, which requires paying income tax on the rolled-over amount.

The Rollover Process Step-by-Step

To begin a direct rollover, your first step is to contact the administrator of the retirement plan you are moving funds from and request their rollover distribution paperwork. This form will ask for your personal information and details about the receiving account. Once you submit the forms, the administrator of your old plan will issue a check made payable to the new institution or will electronically transfer the funds directly into your new IRA. The money never passes through your hands, and the process is complete once the funds are deposited.

For an indirect rollover, the process starts with you requesting a distribution directly from your old plan administrator. If the funds are from an employer plan, the administrator will withhold 20% for federal taxes and send you a check for the remaining 80%. Upon receiving the funds, the 60-day clock begins. Your next action is to deposit the full, pre-withholding amount of the distribution into your new IRA, using your own money to cover the 20% that was withheld.

Tax Reporting for Rollovers

After a rollover, you will receive tax forms documenting the transaction for the IRS. The distributing institution sends Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form reports the total distribution and includes a code in Box 7 indicating the transaction type. For example, a code ‘G’ indicates a direct rollover, which is not taxable.

The financial institution that received your rollover funds will issue Form 5498, IRA Contribution Information. This form reports the amount that was deposited into your new IRA as a rollover contribution. The IRS uses this form to confirm that the funds reported on Form 1099-R were properly placed into a new retirement account and are not a taxable event.

When you file your annual federal income tax return, you must report the rollover to show that it was a non-taxable event. On Form 1040, you will report the total distribution amount on the line for IRA distributions. On the line for the taxable amount, you will enter zero and write “ROLLOVER” in the margin to clarify the nature of the transaction.