Posted by Income Taxes and Bookkeeping LLC

Things You Should Know About IRA Rollovers.

Things You Should Know About IRA Rollovers.

There are subtle variations between what is considered an IRA transfer and what is considered an IRA rollover. Important to know – with either one for the rollover to be tax-free, funds must be transferred into the new account within 60 days of withdrawing the old one (unless it is a trustee-to-trustee transfer)

Here's what you need to know about how these IRA transfers and rollovers work and what you can and can't do.

Moving funds while still employed

Most company pension plans do not allow you to withdraw funds from the plan while still employed. To determine if this is the case, you can call the plan sponsor and ask if they allow what is known as "in-service distribution." The plan usually does not allow this option.

An in-service distribution is another type of transaction other than a loan or hardship withdrawal. An in-service distribution is a transaction in which you can transfer a portion of the funds in your plan to a stand-alone IRA while you are still employed. Only a few plans allow it.

As soon as you stop working for the current employer, the rules change. At this point, it may be a good idea to transfer funds from your plan to an IRA. To avoid tax withholding, you should choose a direct IRA transfer, where the check is payable to the new financial institution as the new administrator or custodian.

While most people think of starting an IRA rollover as transferring funds from a 401 (k) plan to an IRA, there is also a reverse role where the money is transferred from the IRA to a 401 (k) plan. If you have several small IRA and your employer's plan offers good options for low fees, using this reverse switch option can be a way to bring everything together in one place.

Tax obligations when moving funds from an employer plan to IRA 

If you directly receive an eligible rollover distribution, 20% must be withheld for federal taxes. It is sent directly to the IRS. This also applies if you intend to roll over the distribution to a traditional IRA. You can avoid this withholding tax by choosing a direct rollover option if the distribution check is paid directly to the new financial institution.

Transferring funds from one IRA to another.

An IRA transfer happens when you transfer IRA funds from one financial institution directly to another, usually between similar accounts (i.e., a traditional IRA in a single custodian can be transferred to a traditional IRA in a new custodian). As long as there are no distributions payable, the transfer is tax-exempt.

Free use of IRA funds if deposited back into IRA

If you withdraw funds from an individual retirement account and then deposit them into the IRA within 60 days, the transaction will not be taxable. You can only make this type of IRA transfer once every 12 months. This annual provision does not apply to transfers from administrator to administrator if 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 period. However, suppose a portion of the distribution is not repaid within 60 days, and you are under 59½. In that case, this will be considered an early withdrawal from an IRA, and it is subject to penalties and taxes unless you are eligible for the exception. 

Using a rollover to move part of the account

Fortunately, IRA rollovers are not an all-or-nothing proposition. You can use an IRA rollover to transfer part of the funds from one IRA to another or, once withdrawn, transfer part of a company's retirement plan to an IRA.

Inheriting and rolling over into your account

If you inherit a Traditional IRA from a spouse, you can rollover the IRA funds or choose to title it as an Inherited IRA. However, this has advantages and disadvantages.

If you inherit a Traditional IRA from someone else, you will not be able to allow it to receive a rollover contribution. You must withdraw the IRA funds within a specified time according to the required minimum distribution rules (RMD).

Minimum distribution requirements for rollovers

Amounts to be distributed over a given year, per the minimum required distribution rules, are not eligible for IRA treatment. However, you can distribute IRA investment shares to meet RMD requirements. These stocks can remain invested in a brokerage account other than retirement. Whether you distribute cash or stocks, any distributed value of your IRA will be reported on a Form 1099-R and included on your tax return.

Reporting Rollovers on tax returns

IRA rollovers are reported on tax returns but as a tax-free transaction. Even if you complete an IRA rollover, your plan administrator or custodian may incorrectly report it on the 1099-R issued to you and the IRS. 

If your custodian reported the transaction incorrectly and provided documents to your tax professional without explaining the transaction, it may be incorrectly reported on the return. To make sure you don't pay taxes on rollovers or IRA transfers, carefully explain any rollover or IRA transfer to your tax preparer, or check all documentation if you are preparing for your return.

Rollover after-Tax Funds to a Roth IRA Account

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



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