If you received pre-retirement payments from your retirement plan or IRA, you have the choice to have it rolled over to another IRA within 60 days. If you can’t do this yourself, you can ask a financial institution to directly transfer the amount of money you received to another IRA. The main benefit of having your retirement plan distribution rolled over is that you no longer have to pay tax on it until you decide to withdraw it from the plan you have transferred into. Doing this does not only allow you to save for the future but your money remains to grow tax-deferred as well. Not rolling over your payment will cause it to be taxable although you might also qualify for one of the exceptions to the 10% additional tax on early distributions. Rolling over therefore gives you better benefits and more investment choices.
If you’re thinking about doing an IRA Rollover, then you must know these top five basic facts about how it should be done and the rules that need to be followed.
1. Completing a Rollover. There are three ways to complete a rollover; direct rollover, trustee-to-trustee transfer, and a 60-day rollover. If you chose a direct rollover, the distribution you received from your retirement plan can be done by your plan administration through drafting a check sending it directly to the IRA. You must talk to your administrator to completely understand the instructions in doing it. There will be no taxes withheld from the amount being transferred. The trustee-to-trustee transfer on the other hand only means a trustee from your plan transfers the rollover amount to the trustee from another plan. If you directly received a distribution payment, you can deposit the amount or a portion of it to another IRA within 60 days. Missing the 60-day deadline will allow IRS to treat the amount as an early distribution.
2. Including IRA Rollovers On Tax Return. Transactions that involved IRA Rollovers should be reported on your tax return as a non-taxable transaction. Make sure you correctly complete the IRA rollover and that your plan trustee reports it accurately on the 1099-R issued by the IRS. If you’re the one preparing your own tax return, double check all the documents and records you have related to the IRA transfers r if you hired a tax preparer to do your tax return for you, make sure you carefully explained everything they need to know.
3. Following Rules On IRA to IRA Rollovers. Most IRAs are only allowed to be rolled over once a year when it comes to an IRA to IRA transfer. Counting the days will start from the time the distribution is made and cannot be applied to traditional IRAs and Roth IRAs rollovers. Failure to follow this rule can lead to reporting additional IRA to IRA transfers treated as gross income for the next tax season according to when the rollover was completed.
4. Inherited IRA Rolled Over To You Own IRA. If you inherited a traditional IRA from your wife or husband, you can either roll the amount into your own IRA or title it as an inherited IRA. Note that whichever you choose, there will be advantages and disadvantages to expect when doing either of them. It's a different story if the inherited a traditional IRA not coming from your spouse because you won’t be allowed to roll it over or even received a rollover contribution. It is required for you to withdraw the IRA assets within a certain time frame as stated under the required minimum distribution rules.
5. Different Tax Rates Withheld. If you have an IRA, the distribution you received will be subject to a 10% withholding. Although you also have the right to elect out of withholding or have a different amount to be withheld. A trustee to trustee transfer to another IRA can help you avoid withholding taxes. For retirement plans, on the other hand, the distribution you received will be subject to 20% withholding regardless of your rollover plans in the future. There is no withholding if you decide to roll over the amount directly to another retirement plan or IRA as well as when the distribution is sent through a check payable to the receiving plan or IRA.
