IRA/401(K) Rollovers

What is a Rollover IRA?

A Rollover Individual Retirement Account (IRA) is an account that lets you transfer money from an employer-sponsored retirement account to a traditional IRA, helping your assets maintain their tax-deferred status. The majority of preretirement payments from an IRA or a retirement plan can be “rolled over” into a rollover retirement account or another IRA within 60 days; this can be done by your financial institution or directly from your plan. View this Rollover Chart to see a breakdown of rollover transactions.

Rolling over an IRA

When you roll over a retirement plan, you typically don’t have to pay any taxes on it until you decide to withdraw it from your new plan; this means you can save money while allowing your money to grow tax-deferred.

If you choose not to roll over your account, it will remain taxable (unless it is an eligible Roth distribution or if it has already been taxed) and you may have to pay additional taxes unless you qualify for an exception to the 10% additional tax on early distributions.

How does a Rollover IRA work?

Direct rollover – If you are receiving a distribution from a retirement plan, a direct rollover is where your plan administrator makes direct payments to an IRA or a different retirement plan. Your administrator can provide a distribution check that is payable to the new account. In this case, no taxes will be withheld from the transfer. Trustee-to-trustee transfer – If you are receiving a distribution from an IRA, the financial institution that is holding your IRA can initiate the payment directly from your IRA to a retirement plan or a different IRA. In this case, no taxes will be withheld from your transfer. 60-day rollover – If you receive a distribution from a retirement plan or IRA, you can place all of it or part of it into another retirement plan or IRA within 60 days. In this case, taxes will be withheld if the distribution is from a retirement plan, so you’ll need to utilize other funds to roll over the entirety of the distribution.

When should I roll over?

Once you receive a retirement plan distribution or an IRA, you have 60 days to roll it over to another account. In some cases, if you miss the deadline, the IRS may waive the 60-day rollover requirement.

IRA one-rollover-per-year rule

Typically, you can’t issue more than one rollover from the same account within a one-year timeframe, and you can’t issue a rollover from the IRA you put the distribution into for that same amount of time.

As of January 1, 2015, you are only allowed to issue one rollover from one IRA to another (or the same one) during a 12-month timeframe, no matter the number of IRAs you have.

The one-per year limit does not apply to:

Rollover amounts from traditional IRAs to Roth IRAs.
Trustee-to-trustee transfers to a different IRA.
Plan-to-IRA rollovers.
IRA-to-plan rollovers.
Plan-to-plan rollovers.

After this rule goes into effect, the tax ramifications are:

You are required to include gross income from previously untaxed funds that were distributed from an IRA if you initiated an IRA-to-IRA rollover (this excludes rollovers from traditional IRAs to Roth IRAs) in the past 12 months.
You may be required to provide a 10% early withdrawal tax on the amount you have listed in gross income.

To learn more, see the IRA One-Rollover-Per-Year Rule.

What type of distributions can I roll over?

IRAs: You are allowed to roll over all or a portion of the distributions from your IRA. The exceptions to this rule are:

A required minimum distribution.
A distribution of additional contributions and similar earnings.

Retirement Account: You are allowed to roll over all or a portion of the distributions from your retirement account except:

Any loans treated as distributions.
The required minimum distributions.
A distribution that consists of additional contributions and similar earnings.
Any hardship distributions.
Distributions that are a part of substantially equal payments.
Any distribution that is used to pay for health or life insurance, or an accident.
Earnings on employer securities.
Withdrawals electing out of automatic contribution arrangements.
S corporation allotments that are considered distributions.

An eligible rollover distribution is any distribution that can be rolled over. To receive retirement plan distributions, you must satisfy the plan’s specific conditions, such as job termination.

Will taxes be withheld from my distribution?

IRAs: Any IRA distributions you receive are subject to 10% withholding unless you have chosen a different withholding amount or you have elected out of withholding altogether. By selecting a trustee-to-trustee transfer to another IRA, you can avoid withholding taxes.

Retirement plans: Any distribution that is paid to you from a retirement plan is subject to 20% withholding even if you plan to roll it over at a later time. However, withholding is not applicable if you issue a direct rollover to another IRA or retirement plan. Additionally, any distribution you receive in the form of a check payable to the new plan or IRA is not subject to withholding.

How much of a rollover amount is allowed if taxes were withheld from my distribution?

For a retirement plan distribution, if you have not chosen a direct rollover, or if you have not opted out of withholding as it relates to an IRA distribution, the administrator of your plan or IRA trustee will withhold taxes from your distribution. However, if you choose to roll over the distribution within 60 days, you are required to use other funds to balance the withheld amount.

Example: Sarah, age 44, receives a $10,000 rollover distribution from her 401(k) plan, and her employer withheld $2,000 from the distribution.

If Sarah chooses to later roll over $8,000 and not the $2,000 withheld, she will list $2,000 as taxable funds, $8,000 as a nontaxable rollover, and $2,000 as paid taxes. Sarah will also pay 10% additional tax on early distributions on the $2,000 unless she is eligible for an exception.
If Sarah chooses to roll over the entire $10,000, she must provide $2,000 from another income source. She will list $10,000 as a rollover that is nontaxable and $2,000 as taxes paid.

By choosing to roll over the entire amount of eligible rollover distributions, (the full amount and the 20% that was withheld):

Your full distribution will be tax-free.
The 10% tax on early distributions will be avoided.

What happens if I fail to make a choice regarding my retirement distributions?

In this case, your plan administrator must provide written clarification for your distribution rollover options, as well as your right to have the distribution moved directly to another IRA or retirement plan.

If your employment has ended with the employer who maintains your retirement plan and your account has $1,000 to $5,000 in it, the plan administrator can put the money into an IRA in your name if you have not chosen to roll it over or receive it. For accounts with less than $1,000, the administrator can pay it to you with 20% income tax withholding, without your consent. However, you may still roll it over within 60 days.

Which retirement accounts accept rollovers?

Almost any type of IRA or retirement plan will allow you to roll over. For more information, view this Rollover Chart.

Are retirement plans required to allow transfers of eligible funds for a distribution?

If you get a rollover distribution from your plan of at least $200, your administrator must give you a notice to let you know your rollover and transfer rights and must initiate a direct transfer to another IRA or retirement plan.

Is it a requirement for my retirement plan to accept rollovers?

It is not mandatory for your plan to accept rollover contributions. If you have questions, reach out to your plan administrator to see what is allowed and what kind of contributions are approved.

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