Everything you Need to Know About IRA Rollovers

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Updated on Wednesday, February 13, 2019

Moving money in or out of an IRA to or from another account is called a rollover. It’s important to understand how IRA rollovers work to use this option to maximize your retirement portfolio. We’ll guide you through the basics of IRA rollovers and the possible advantages of this option.

What is a Rollover?

A rollover entails the transfer of retirement money from one plan to another. This might mean from an employer-sponsored retirement plan like a 401(k) plan to an IRA or from one IRA account to another. It’s important to understand and follow the rules for performing a rollover so you don’t trigger an unwanted taxable event by doing things incorrectly.

In this article, we will break down the IRS rollover chart into smaller bits to help you understand various rollover rules.

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Rollover Types

  • With a direct rollover, your account administrator moves money from your existing retirement plan, such as a 401(k), directly to an IRA account or to a new employer’s retirement plan. This is often the easiest and most hassle-free method to a rollover. No taxes will be withheld from the rollover amount.
  • A trustee-to-trustee transfer is used when taking a distribution from an IRA account. This means the financial institution that holds your IRA account will transfer the money directly to either an IRA account at another institution or to an employer-sponsored retirement account. This method allows you to avoid paying taxes on the transfer.
  • A 60-day rollover pertains to a distribution from an IRA that is directly paid to you. You will need to deposit the money in another IRA account or into an employer-sponsored retirement plan for the distribution to retain its tax-deferred status (and avoid any applicable fees). There is a mandatory tax-withholding when the distribution is made directly to you. To avoid paying taxes, you will need to deposition 100% or the amount distributed. This means that you will need to come up with the money withheld in taxes.

Before you consider a rollover involving an IRA, it’s important to keep the 12-month rule in mind. This rule applies to rollovers between IRA accounts, and only allows one rollover from the same IRA plan within one year.

Rollovers from an employer-sponsored retirement plan

It’s common to do a rollover from a 401(k), 403(b) or other types of employer-sponsored retirement plan when leaving an employer.

Rolling a balance into a traditional 401(k), 403(b), governmental 403(b), money purchase plan or a defined benefit plan (if there is a lump-sum option) to a traditional IRA is generally a matter of simply moving the money. These plans are typically funded with pre-tax money that has never been taxed.

Rolling a designated Roth account within an employer-sponsored retirement plan, such as a 401(k), to a Roth IRA account is also pretty straightforward since you are dealing with post-tax dollars in both cases.

Rollovers can sometimes be made into a new employer’s retirement plan if that plan accepts rollovers. However, it’s important to tread carefully when you attempt to roll over one plan type into a different type to ensure that the rollover is allowed, and that you are aware of any tax consequences. For example, rolling a 401(k) from your old employer to one at a new employer should be pretty straightforward. If the plans are different — for instance, moving a 401(k) to 403(b) — rollovers may or may not be allowed.

Money from a traditional IRA can be moved to a qualified plan that accepts rollovers, which is often a 401(k). In this case, the money from the IRA must have all originated from pre-tax contributions if rolled into a traditional 401(k) account. Performing this type of rollover will always depend on whether or not the receiving plan will accept such rollovers.

The chart below provides a quick glance at some rollover options when leaving a company:

Roll to:

Roll from:

Traditional IRARoth IRAQualified plan (pre-tax) 401(k), 403(b), 457(b)403(b)Governmental 457(b)Designated Roth account
Qualified plan (pre-tax) 401(k), 403(b), 457(b)YesYes1Yes2Yes2Yes2, 4Yes1, 3
403(b)YesYes1YesYesYes4Yes1, 3
Governmental 457(b)YesYes1YesYesYesYes1, 3
Designated Roth accountNoYesNoNoNoYes
Source: IRS
1. A rollover to a Roth IRA from one of these retirement accounts (in a non-Roth format) can be done, but this would constitute a Roth conversion that would result in taxable income.
2. Money from a qualified plan such as 401(k) plan can be rolled over to a qualified plan at another employer if the new plan accepts such rollovers. Typically, the funds have to be of the same type; for example, all contributions were made with pre-tax dollars.
3. Must be an in-plan rollover.
4. The 457 plan must have separate accounts.

Rollovers from a SIMPLE IRA?

SIMPLE IRAs are a small business retirement plan. Participants in a SIMPLE IRA can generally roll money from or to a SIMPLE, but there are a few additional restrictions to be aware of.

Within the first two years of your participation in a SIMPLE IRA, you could face a 25% penalty for rolling your account balance from a SIMPLE IRA to another IRA or company retirement plan. However, you may avoid the penalty if you roll your SIMPLE IRA to another SIMPLE IRA account.

The two-year requirement would apply when you perform a rollover to a:

  • Traditional IRA
  • SEP IRA
  • Governmental 457(b) plan
  • Qualified plan (pre-tax)
  • 403(b) plan

Money can be rolled over to a SIMPLE IRA from most plans except a Roth IRA or designated Roth account within a retirement plan. Only one rollover to a traditional IRA or another SIMPLE IRA within 12 months is allowed.

Rollovers to and from an IRA

There can be any number of reasons to do a rollover from one IRA account to another. Perhaps you want to move to another IRA custodian that is a better fit for your needs. Or perhaps you have several IRAs and other retirement accounts scattered across various custodians or even old employers.

Consolidating these accounts in one place may be advantageous for you. Rollovers to and from IRA accounts have their own set of rules and it behooves you to understand them so as not to trigger an unwanted tax penalty. In this scenario, you’ll want to pay close attention to the 12-month rule and the 60-day rule discussed above.

Roll to:

Roll from:

Traditional IRARoth IRASEP IRAQualified plans (pre-tax)403(b)Governmental 457(b)Designated Roth account
Traditional IRAYes3Yes1Yes3YesYesYes2No
Roth IRANoYes3NoNoNoNoNo
SEP IRAYes3Yes1Yes3YesYesYes2No
Source: IRS
1. A rollover to a Roth IRA from one of these retirement accounts (in a non-Roth format) can be done, but this would constitute a Roth conversion that would result in taxable income.
2. The 457 plan must have separate accounts.
3. Only one rollover per 12-month period.

The bottom line

The ability to roll over to and from IRA accounts is one of their most attractive features. This tool can be handy to those saving for retirement as long as they take the time to understand the rules governing such rollovers.

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