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