A rollover of retirement funds is moving from one account – or one type of account – to another. You see, most payments you get – before retirement – from an IRA or other retirement plan can be “rolled over” by simply depositing them in another retirement plan within 60 days. You can have your financial institution or plan administrator transfer the payment directly to another plan or IRA. The IRS's rollover chart has details of the various plans and rollover requirements.
When you roll over that payment from a traditional IRA, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, your money continues to grow tax-deferred. If you don’t roll over the distribution, it will be taxable and you might even be subject to a 10 percent penalty unless you’re eligible for one of the exemptions. Roth IRAs, of course, are different, since their distributions are generally tax-free.
Playing the Rollover Game
There are three ways to make a rollover:
- Direct rollover – You can ask your plan administrator to send your distribution directly to another retirement plan or IRA. Contact your administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from the transfer.
- Trustee-to-trustee transfer – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount. This is the easiest option.
- 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or part of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a traditional IRA, so you’ll have to use additional funds in order to roll over the full amount of the distribution.
You generally have 60 days to rollover a distribution you received from a retirement plan into another plan without being taxed on that distribution. The IRS does allow some exemptions to the 60-day rule, mostly for circumstances beyond your control.
IRA Rollover Limits
You generally cannot make more than one rollover from the same IRA within a one-year period. You also cannot make a rollover during that one-year period from an IRA that received the rollover. You can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.
The one-per-year limit does not apply to:
- Conversions from traditional IRAs to Roth IRAs
- Trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- Plan-to-IRA rollovers
- Plan-to-plan rollovers
You must include any previously untaxed amounts distributed from an IRA in gross income if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months; you may also be subject to the 10 percent early withdrawal penalty on the amount.
What to Roll
For IRAs, you can roll over all or part of any distribution except a required minimum distribution, or a distribution of excess contributions and their related earnings.
You can roll over all or part of your retirement plan account except:
- Required minimum distributions
- Loans treated as a distribution
- Hardship distributions
- Distributions of excess contributions and related earnings
- A distribution that is one of a series of substantially equal payments
- Withdrawals electing out of automatic contribution arrangements
- Distributions to pay for accident, health or life insurance
- Dividends on employer securities
- S corporation allocations treated as deemed distributions
Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you’ll have to meet the plan’s conditions for a distribution in the first place.
Rollovers and Taxes
An IRA distribution paid directly to you is subject to 10 percent withholding unless you opt out of withholding or choose to have a different amount withheld. You can avoid the withholding altogether if you choose instead to do a trustee-to-trustee transfer to another IRA.
When a retirement plan distribution is paid to you, it’s subject to mandatory withholding of 20 percent – even if you intend to roll it over later. You can escape the withholding if the distribution is rolled over directly to another retirement plan or to another IRA. Even if you receive a check, if it’s made out to the receiving plan or IRA (not to you), there’s no withholding involved.
While you can roll your money into just about any type of retirement plan or IRA, remember that your retirement plan may not be required to accept rollover contributions. So check with your new plan administrator about what kind of contributions are accepted.