It’s my annual “Taxes from A to Z” series! Next up:
Building your nest egg for retirement? Most of us simply make contributions and leave it alone. Occasionally, however, there might be a situation when you need or want to move funds from one plan to another. There’s just one problem: once you pull pre-tax dollars out of a tax deferred account, it’s subject to tax.
With this in mind, a special maneuver called a “rollover” was created to allow you to move funds from one account to another and not subject it to tax. There are a few ways to accomplish a rollover:
- 60-day rollover. This is the most heart-stopping of all of the rollovers. With a 60-day rollover, the distribution from an IRA or retirement plan is paid out directly to you, most commonly by check made payable to you. If, within 60 days, you deposit any or all of those funds into another qualifying IRA or retirement amount, that amount is not taxable (although taxes may be withheld on the distribution). If you miss that window, the entire amount is subject to tax and possibly, an extra penalty for early distributions (a waiver may be available in some circumstances).
- Direct rollover. A safer alternative to the 60-day rollover is the direct rollover. With a direct rollover, a distribution from a retirement plan is paid directly to another retirement plan or to an IRA, often by check made payable to the new account.
- Trustee-to-trustee transfer. As with a direct rollover, this is a less risky approach than the 60-day rollover. With a trustee-to-trustee transfer, a distribution from an IRA is paid directly to another IRA or retirement plan.
You can roll over all or part of any distribution from your IRA except a required minimum distribution (RMD) or a distribution of excess contributions and related earnings.
The same exceptions for RMDs and distributions of excess contributions and related earnings applies to retirement plan accounts with a few more: loans treated as a distribution, hardship distributions, a distribution that is one of a series of substantially equal payments, withdrawals electing out of automatic contribution arrangements, distributions to pay for accident, health or life insurance, dividends on employer securities, or S corporation allocations treated as deemed distributions.
It used to be the rule that could not make more than one rollover from the same IRA within a one year period. You also could not make a rollover during this one-year period from the IRA to which the distribution was rolled over. But starting in 2015, the law is even more tightly drawn: now, you can make only one rollover from an IRA to another IRA in any one year period, regardless of the number of IRAs you own (including SEP and SIMPLE IRAs, traditional and Roth IRAs). That restriction does not apply to Roth conversions, trustee-to-trustee transfers, IRA-to-plan rollovers, plan-to-IRA rollovers and plan-to-plan rollovers.
The rules governing to rollovers are hyper technical and the IRS doesn’t play around. Missing the date by even a single day can have serious tax consequences. If you’re thinking about making a rollover, consult with your your financial advisor and your tax advisor to make sure that you get all the details – including accounting for any withholding – right.
