IRA Rollover Defined
An IRA (individual retirement account) rollover is the movement of funds from a retirement account into a Traditional IRA or a Roth IRA.
A direct rollover IRA occurs when funds are moved from one retirement account like a 401(k) and moved directly to an IRA. Most rollovers take place when the retirement account holder switches jobs and wants to move assets to an IRA.
Moving assets from an IRA account into another IRA account is known as a transfer. Transfers can occur when account holders want to switch IRAs or find an IRA with better investment opportunities, such as those you might find in a self-directed IRA.
To begin an IRA rollover, you will need to ask your current IRA custodian to write a check and send it to your new IRA. If the rollover IRA is being funded from an outside IRA, the current IRA custodian sends the rollover amount to the new IRA plan’s custodian. If you wish to complete this process yourself then you will need to have the check sent to you. You will then cash the check and deposit the funds within 60 days. If this process is not completed within 60 days, income taxes will have to be paid on that amount and the IRS will treat it as an early distribution.
Rollovers and Taxes
When completing a direct transfer, no taxes are withheld. If the transfer is not completed as a direct IRA rollover, or if you make a mistake in your rollover, you may be liable to pay taxes and penalties.
Common IRA Rollover Mistakes to Avoid
There are many IRA rules that can seem daunting, and most investors need to be aware of these to keep from harming their retirement savings. These rules apply to all IRA rollovers.
The 60-Day Rule
After initiating the movement of funds from your existing retirement accounts, you have 60 days to complete the rollover of those funds to another IRA. 60 days means 60 days, not two months, which is a common mistake that some investors make.
You can apply for a waiver or extension from IRS, but unless you receive one, failing to deposit your funds into your rollover IRA can cost you in terms of taxes and penalties.
Same Property Rule
The same property rule most often applies in transfers from one IRA account to another IRA account. In that case, the assets being moved must be the same property. So, for instance, you couldn’t take a cash distribution from your original IRA, purchase assets, then deposit those assets into a new IRA. You would have to deposit cash.
Because the same property rule can be tricky, and different rules can apply between an IRA to IRA transfer and a 401(k) to IRA rollover, you’ll want to consult a financial advisor or tax advisor to make sure you’re following all the rules.
One-Year Waiting Rule
This is another rule that applies to IRA to IRA transfers. For one year after transferring assets tax-free from one IRA to another IRA, you cannot make another tax-free transfer. This rule doesn’t apply to rollovers from employer-sponsored plans such as 401(k)s, 403(b)s, and 457s. It also doesn’t apply to Roth conversions, in which you roll over assets from a Traditional IRA into a Roth IRA.
RMDs Are Ineligible
While you can make tax-free rollovers from an IRA at any age, once you are required to take required minimum distributions (RMDs) at age 72, your RMDs become ineligible for rollovers. For instance, you could not take an RMD from your IRA account, purchase new assets, and then move those assets into another IRA.
This is another rule that can be tricky for inexperienced investors, which is why it can help to consult a tax advisor or financial advisor once you reach age 72.
These IRA rollover rules might seem tricky, but our experts are available to help answer questions you have about the rollover process and set up your rollover IRA.