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IRA Rollover Rules: Important Things to Note

IRA Rollover Rules: Important Things to Note


One of the smart money moves one can make toward retirement is to roll over your 401(k) to your Individual Retirement Account (IRA). This is especially good for people adjusting to retirement or leaving a job.

While the employer sponsors the 401(k), you own the IRA and are in control. The 401(k) enjoys benefits like tax-deferred status, so you can use it with your current employer plan. 

The rollover is a great move. However, Uncle Sam has some rules that you need to follow. 

Understanding What IRA Rollover is 

With a rollover IRA, you can move funds from a 401(k) or other retirement-sponsored plan (via your employer) to your IRA. A financial institution will likely be in charge of your portfolio when you have a 401(k). In changing jobs, however, one can easily lose track of such savings.

Indirect Rollover 

You can move money in two ways, rolling over your 401(k) to your IRA – direct or indirect rollover. An indirect rollover lets you move the funds from one retirement account into another. With this, you get the funds from your 401(k) and deposit them into the new IRA account. 

An indirect rollover, however, comes with a couple of risks:

  • After removing the funds from the retirement account, it should be deposited into a new tax account within 60 days. Failure might result in taxes and other penalties.

  • Fees and taxes for failure to follow the 60 days rollover rule exist. There could be a 10% early distribution penalty or the funds subjected to income tax. 

  • In reinvesting the funds, one must deposit the entire amount. 

Direct Rollover

This is an easy option for many people. It involves directly transferring your funds to your new IRA by your retirement plan administrator. The firm sends the funds to your selected financial institution as a trustee-to-trustee transfer. 

Also, your 401(k) admin might present a check to the other firm, which will be deposited in your new IRA account. 

The unique advantage of this approach is that the funds do not cross your hands. As a result, Uncle Sam does not consider it a withdrawal. With this, you might avoid any penalty or tax from the IRS. 

Rules and Limits for IRA Rollover

There are a couple of rules to follow for your IRA rollover to avoid issues. Here are a few things to know:

  1. 60 Days Rollover Rule: 

This applies to indirect rollovers. With this rule, you must deposit the funds into the new IRA account within 60 days of withdrawing it. Failure will result in a  10% early withdrawal fine or income tax

  1. A Single IRA Rollover Each Year

Uncle Sam specifies that one can only have a single indirect rollover from an IRA in 12 months. While the policy was meant to stop people from using their funds, exceptions are based on the IRA account type. With this, the one-year rule does not apply to the following:

  • Traditional to Roth retirement account.

  • QRP to IRA rollover or vice versa

  1. Some Distributions are not Eligible

One cannot roll over all distributions. When it comes to IRA, you cannot roll over the following: excess contribution distribution with its earnings, Required Minimum distribution, etc. 

On the other hand, distributions from hardships and loans, RMDs, and other accounts as specified by Uncle Sam. 

  1. Same property Rule

With this rule, individuals must contribute the property they withdrew when completing a rollover. This implies that any cash from your first retirement account cannot be used for shares or stocks and be rolled over to a new IRA. 

There are few investment options when the funds are transferred between both retirement accounts.