10 Things to Know About IRA Rollovers - Tax Professionals Member Article By Abundant Wealth Planning LLC
Posted by Abundant Wealth Planning LLC

10 Things to Know About IRA Rollovers

10 Things to Know About IRA Rollovers

There are narrow differences between what is considered an IRA rollover and an IRA transfer. Important to know: For the transfer to be tax-free, funds must be deposited into the new account within 60 days of withdrawal from the old account (unless it is a trustee-to-trustee transfer, as discussed in more detail below).

You need to know how these IRA transfers and rollovers work and what you can and cannot do.

Moving funds while still employed

Most company pension plans do not allow you to withdraw funds from the plan while you are still gainfully employed. To be sure they do, you can get in touch with your plan sponsor and ask if they allow "in-service distribution." The plan does not necessarily have to allow this option.

An in-service distribution is a transaction other than a hardship withdrawal or a bad loan. An in-service distribution is dealing where you can transfer a portion of your plan funds to a self-directed IRA while you are still employed. Only certain plans allow it. 

Once you stop working there, the rules change. At the time, rolling over funds from your plan to an IRA may be a good idea. To avoid withholding taxes, you must choose a direct IRA rollover, where the check is payable to the new financial institution as the new trustee or custodian.

While most people think of an IRA rollover as transferring funds from a 401(k) to an IRA, there is also a reverse rollover where you transfer money from your IRA to a 401(k). If you have small IRAs in many places and your employer's plan offers good funding options at low rates, using this reverse rollover option may be a way to consolidate everything into one place.

Tax obligations when moving funds from an employer's plan to an IRA

If a qualifying rollover distribution is paid directly to you, 20% must be withheld for federal income tax. This is sent directly to the IRS. This is also true if you transfer the distribution to a traditional IRA. You can avoid this mandatory withholding by choosing a direct transfer option, where the distribution check is paid directly to your new financial institution.

Transfer funds from one IRA to another IRA

An IRA rollover occurs when you transfer IRA funds from one financial institution directly to another, usually between similar accounts (just as a traditional IRA at one custodian can be rolled into a traditional IRA at a new custodian). The transfer is tax-free if no distribution is due to you. 

Using IRA Funds Tax-Free to Deposit Back Into IRA

The transaction will not be taxed if you withdraw funds from an IRA and then put them back into the IRA within 60 days. You can only perform this type of IRA rollover once per 12-month period. This annual provision does not apply to trustee-to-trustee transfers where money is sent directly from one institution to another.

You can use this 60-day provision to "borrow" funds from your IRA for a short time. However, suppose a portion of the distribution is not paid within 60 days, and you are under age 59.5. In that case, this will be considered an early withdrawal from the IRA, subject to taxes and penalties, except if you get an exception.

Using a rollover to move part of your account  

Fortunately, IRA rollovers aren't an all-or-nothing proposition. You can use an IRA rollover to transfer part of your funds from one IRA to another, or after retirement, you can transfer the part from a company retirement plan to an IRA.

Inheriting and transferring it to your account

If you come into a traditional IRA from your spouse, you can transfer the funds over to the IRA or choose to call it an inherited IRA. There are cons and pros to doing it both ways.

If you inherit a Traditional IRA from an individual other than your spouse, you cannot reverse it or allow it to receive a rollover contribution. You must withdraw assets from your IRA within a certain period according to the required minimum distribution (RMD) rules.

Rollover Required Minimum Distribution Requirements

Amounts that must be distributed in a given year in accordance with the required minimum distribution rules are not eligible for IRA rollover treatment. However, you can distribute investment shares from your IRA to meet RMD requirements. These shares can remain invested in a non-retirement brokerage account. Whether you distribute cash or stock, any amount distributed by the IRA will be reported on Form 1099-R and included on your tax return as income.

Reporting Rollover Transaction on your Tax Return

IRA rollovers are written on your tax return but as a non-taxable transaction. Even if you make a successful IRA rollover, your plan administrator or custodian may incorrectly report you on the 1099-R they sent to you and the IRS. 

If your custodian misreported the transaction and gave the paperwork to your tax professional without explaining it, it may be misreported on your return. To ensure you don't pay taxes on an IRA transfer or rollover, explain any IRA transfer or rollover transaction to your tax preparer or double-check all documents if you prepare your own return.

Rollover After-Tax Fund to a Roth IRA

Recent tax rulings confirm that after-tax money from a qualified business plan can be transferred to a Roth IRA. This is a great option because the money in a Roth IRA grows tax-free, and you won't have to take the required distributions from a Roth.

Transfer of company shares from the plan to the IRA account

You can use a special tax rule to distribute company stocks outside the plan when you retire or stop working there. This is a distribution option called Net Unrealized Appreciation (NUA). Some 401(k) plans may let you transfer existing stock directly into an IRA. Many institutions require funds to enter the IRA in cash rather than stock. Check with your 401(k) financial custodian for permitted distribution options.

Am I required to transfer my 401(k) to an IRA once I quit my job?

Converting your 401(k) to an IRA isn't the only option. However, to avoid paying penalties and taxes, you should keep this money in your current plan if your employer allows it and transfer it to a new IRA, an existing IRA, or another 401(k). If you hold 401(k) or IRA funds for more than 60 days, you will be subject to taxes and a 10% penalty if you are under age 59.5.

Can I have multiple IRAs?

You can have multiple IRA accounts. For example, you can have a Traditional IRA and a Roth IRA. Limits on the amount you can contribute to an IRA apply to all IRAs you own. For 2022 taxes, the IRA contribution limit is $6,000 for those under age 50 and $7,000 for those aged 50 and older.

Can I roll over from my IRA as many times as I want?

The IRS limits the number of transfers you can make. You can only switch from one IRA to another or the same IRA within 12 months. There are a few exceptions to this limit.



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