10 Things You Need to Know

There are subtle differences between what is considered an IRA rollover, and what is considered an IRA transfer. The important thing to know – with either one for the rollover to be tax-free, the funds must be deposited in the new account no later than 60 days from the time they were withdrawn from the old one (unless it’s a trustee-to-trustee transfer, as discussed in more detail below).1

Below are things you need to know about how these IRA rollovers and transfers work, and what you can and cannot do.

Moving Funds While Still Employed

Most company retirement plans do not allow you to move funds out of the plan while you are still employed. To find out if they do, you can call your plan sponsor, and ask if they allow what is called an “in-service distribution.” The plan does not have to allow this option.

An in-service distribution is a different type of transaction than a loan or hardship withdrawal. An in-service distribution is a transaction where you can roll over a portion of funds in your plan into a self-directed IRA account while you are still employed. Only some plans allow this.2

Once you are no longer employed there, the rules change. At that time it may make sense to roll funds from your plan into an IRA account. To avoid tax withholding, you’ll want to choose what is called a direct IRA rollover where the check is made payable to your new financial institution as the new trustee or custodian.1

Although most people think of an IRA rollover as moving funds from a 401(k) to an IRA, there is also a reverse rollover where you move IRA money back into a 401(k) plan. If you have small IRA accounts in many places, and your employer plan offers good fund choices with low fees, using this reverse rollover option can be a way to consolidate everything in one place.

The Tax Obligations When Moving Funds From Employer Plan to IRA

If an eligible rollover distribution is paid directly to you, 20% of it must be withheld for federal taxes. This is sent directly to the IRS. This applies even if you plan to roll over the distribution to a traditional IRA. You can avoid this mandatory tax withholding by choosing a direct rollover option, where the distribution check is payable directly to your new financial institution.1

Transferring Funds From One IRA to Another IRA

An IRA transfer occurs when you move IRA funds from one financial institution directly to another, generally between like accounts (i.e., a traditional IRA at one custodian can transfer to a traditional IRA at a new custodian). As long as there is no distribution payable to you, then the transfer is tax-free.

Using IRA Funds Tax-free If Depositing Back into IRA

If you withdraw funds from an IRA, and then subsequently redeposit them to your IRA within 60 days, the transaction would not be taxed. You can only do this type of IRA transfer once in any 12 month time period. This one-per-year provision does not apply to trustee-to-trustee transfers where the money is sent directly from one institution to another.

You could use this 60-day provision to “borrow” funds from your IRA for a short period of time. However, if any portion of the distribution is not repaid within the 60 days, and you are under age 59 1/2, it would be considered an IRA early withdrawal, subject to taxes and penalties, unless you can qualify for an exception.1

Using a Rollover to Move Part of Account

Luckily IRA rollovers are not an all-or-nothing proposition. You can use an IRA rollover to move a portion of your funds from one IRA to another, or once retired, to rollover part of a company retirement plan to an IRA.

Inheriting and Rolling Into Your Own Account

If you inherit a traditional IRA from your spouse, you can roll the funds into your own IRA, or you can choose to title it as an inherited IRA. There are pros and cons to doing it either way.

If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a specified period of time according to the required minimum distribution (RMD) rules.

Rollover Required Minimum Distributions Requirements

Amounts that must be distributed during a particular year under the required minimum distribution rules are not eligible for IRA rollover treatment. However, you can distribute shares of investments from your IRA to satisfy the RMD requirements. These shares can then stay invested in a non-retirement brokerage account. Whether you distribute cash or shares, any amount distributed from your IRA will be reported on a 1099-R and is included on your tax return as income.1

Reporting Rollover Transactions On Tax Return

IRA rollovers are reported on your tax return but as a non-taxable transaction. Even if you correctly execute an IRA rollover, it is possible that your plan trustee or custodian will report it wrong on the 1099-R they issue to you and the IRS. I have seen this occur many times in my career.

If your custodian reported the transaction incorrectly, and you handoff the documentation to your tax professional without explaining the transaction to them, it could get reported on your return incorrectly. To make sure you don’t pay tax on an IRA rollover or transfer, carefully explain any IRA rollover or transfer transactions to your tax preparer, or double-check all documentation if you prepare your own return.

Rollover After-Tax Funds to a Roth IRA

Recent tax rulings confirm that after-tax money in a qualified company plan can be rolled to a Roth IRA. This is a great option as Roth IRA money grows tax-free and you will not have required distributions from a Roth.3

Transferring Company Stock From Plan to IRA

You may be able to use a special tax rule to distribute shares of company stock out of the plan once you are retired or no longer working there. It is a distribution option called Net Unrealized Appreciation (NUA).4 Some 401(k)s may allow you to transfer existing shares directly to an IRA. Many institutions require the funds to go to your IRA as cash instead of as shares. Check with your 401(k) plan financial custodian to see what distribution options are allowed.

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