If you change employers or you’re ready to retire and are wondering what to do with your old retirement plan, you may be interested in learning more about rollovers.
A rollover is simply what happens when you move savings in one retirement fund into a new retirement fund.
Rolling over an IRA can be tricky, however, and investors should make sure they are up-to-date on the latest tax rules before moving money from one retirement account to another.
How do I rollover my IRA distributions?
There are three ways to roll over distributions.
Direct rollover: Your retirement plan administrator can deposit the distribution from your retirement plan directly into another retirement plan or IRA. Alternatively, your employer may send you a check for the full amount of your account balance made payable to your new account, which you can deposit. Taxes will not be withheld from the amount that is transferred, so long as you complete the transfer within 60 days.
Trustee-to-trustee: In this situation, which involves transfers from one IRA to another IRA, you can ask the financial institution that holds your IRA to make the distribution payment directly into another IRA or retirement plan.
60-day rollover: Sometimes financial institutions will issue distributions from an IRA or retirement plan directly to you. In this case, you can deposit all or part of the distribution into another IRA or retirement plan within 60 days. An individual can make this type of transfer once per year without paying taxes; otherwise, the distribution is subject to a 10% withholding, unless you elect out of the withholding or request that a different amount be withheld.
What are the rules for rolling over an IRA distribution?
Per the IRS: “You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control.”
You generally cannot make more than one rollover from the same IRA within a 1-year period, according to the IRS. The one-per-year limit IRA rollover rule does not apply to:
- Rollovers from traditional IRAs to Roth IRAs
- Trustee-to-trustee transfers between IRAs
- IRA-to-retirement plan rollovers
- Retirement plan-to-IRA rollovers
- Retirement plan-to-retirement plan rollovers
IRA rollover rules for different types of retirement plans
This chart summarizes which retirement plans can be rolled over into other retirement plans.
|Roth IRA||Traditional IRA||SIMPLE IRA||SEP-IRA||457(b)||403(b)||401(k)|
|Traditional IRA||Yes||Yes*||Yes*, after two years||Yes*||Yes||Yes||No|
|Simple IRA||Yes, after two years||Yes*, after two years||Yes*||Yes*, after two years||Yes, after two years||Yes, after two years||No|
|SEP-IRA||Yes||Yes*||Yes*, after two years||Yes*||Yes||Yes||No|
|457(b)||Yes||Yes||Yes, after two years||Yes||Yes||Yes||Yes|
|403(b)||Yes||Yes||Yes, after two years||Yes||Yes||Yes||Yes|
Here’s more about the rules for each type of rollover:
For investors who own IRA CDs from different banks and credit unions to maximize interest rates, the rule has made it more difficult to transfer their savings to institutions offering better deals on APYs. Multiple transfers are still allowed in a 12-month period, but they must be trustee-to-trustee. That means you can’t take the cash out for 60 days penalty-free and use it before depositing it into a new financial custodian more than once every 365 days. Money must be transferred directly from one custodian to another.
Roth IRA rollover
Roth IRAs can only be rolled over into another Roth IRA.
Traditional IRA rollover
Traditional IRAs can be rolled over into almost any other retirement account, such as a 401(K) plan, as long as the rules of the new account allow it to accept the rollover.
SIMPLE IRA rollover
SIMPLE (Savings Incentive Match Plan for Employees) IRA plans are available to businesses with 100 employees or fewer that allow matching employer contributions.
Rollovers are allowed from one SIMPLE IRA to another SIMPLE IRA, and a tax-free rollover may be made between a SIMPLE IRA to a different kind of IRA after participating in the SIMPLE IRA plan for two years.
Section 457 of the Internal Revenue Code allows some non-qualified, deferred compensation plans to receive tax-advantaged treatment. This type of plan must be sponsored by a government unit (such as a state or state agency) or a non-governmental sponsor that is exempt from income tax under IRC Section 501(c).
Following the passage of a new law in 2001, distributions from governmental 457(b) plans can be rolled over tax-free into traditional IRAs and 401(k), 403(b), and 457 government plans that accept rollovers.
Two types of distributions from a 457(b) plan that cannot be rolled over include:
- Distributions you are already receiving as equal periodic payments over 10 or more years or as lifetime annuity payments
- Required minimum distributions you received after age 70½
- Distributions from non-governmental 457(b) plans are not eligible for rollover
This type of plan is offered by public schools and 501(c)(3) tax-exempt organizations, and is funded by employee and/or employer contributions. Contributions and earnings are tax deferred. Rollovers, which must meet eligible distribution rules, are allowed to and from other retirement plans, including IRAs, 401(k) plans, and other 403(b) plans.
401(k) to IRA rollover
The IRS allows distributions from almost any kind of retirement plan, including workplace 401(k) plans, to be rolled over into a Roth IRA.
According to the IRS, exceptions include:
- Required minimum distributions (the minimum withdrawal required after age 70½)
- Hardship distributions (withdrawals that fall under the IRS’s definition of “immediate” or “heavy” need for the employee and can include need of the spouse, non-spouse, dependent or non-dependent beneficiary of the employee)
- Loans from the 401(k) that are treated as distributions
- Distributions of excess contributions and related earnings
- Distributions to pay for accident, health, or life insurance
- Withdrawals electing out of automatic contribution arrangements
- A distribution that is one in a series of substantially equal payments
- Dividends on employer securities
- S corporation allocations that are treated as deemed distributions
Special rules also apply to other types of IRA rollover situations
Inherited IRA rollover rules
People often leave their IRAs to spouses or other beneficiaries, and the IRS has specific rules for each situation depending on who inherits the account.
Rules for spouses
Spouses who inherit a traditional IRA have three options:
- Designate yourself as the account owner and treat it as your own IRA.
- As the new account owner, roll the IRA into a traditional IRA. If it is taxable, it can be rolled over into a:
- Qualified employer plan
- Section 403(a) plan (qualified employer annuity plan)
- Section 403(b) plan (tax-sheltered annuity plan)
- Section 457 (b) plan (state or local government-deferred compensation plan)
- Qualify yourself as the beneficiary of the plan rather than treating the IRA as your own.
If you receive distributions from your deceased spouse’s IRA, you can roll them over into your IRA within 60 days if the distribution is now a required distribution.
Rules for other beneficiaries
If you have inherited a traditional IRA from someone other than your spouse, you cannot treat it as your own by making contributions or rolling any amount in or out of it.
However, non-spouse beneficiaries can make trustee-to-trustee transfers if the new IRA is created and maintained in the name of the deceased IRA owner to benefit the non-spouse beneficiary.
IRA Rollover mistakes to avoid
The biggest mistake investors can make when rolling over an IRA is to have the proceeds issued in a check to themselves rather than doing a trustee-to-trustee transfer. "It can be tempting to keep the money, which could lead to an unexpected tax bill and penalties," said Michael Kalscheur, a senior financial consultant with Castle Wealth Advisors in Indianapolis.
“It’s very dangerous,” he said. “I would say every single time you have qualified money, especially pretax money, you need to roll it directly into an IRA. Don’t get a check. Don’t get a distribution.”
A 2014 tax court ruling allows this kind of transfer only once every 365 days, and if you withdraw money from an IRA again during that time period, it could be subject to a 10% early withdrawal tax.
"If you are transferring a 401(k) plan into an IRA because you have changed jobs, most financial institutions will mail you a check," said David M. Carroll, a certified financial planner with Rockbridge Investment Management in Syracuse, N.Y. In this instance, make sure that the check is made out to the custodian of the IRA with you noted as the beneficiary — this exempts the transfer from the 60-day rollover rule.
“It’s deemed a direct rollover even though it’s technically not,” Carroll said.
Clients often worry about a sizeable check, but Carroll advises investors to be on the lookout for the check and then take it to their financial adviser, who will mail it to the new IRA custodian.
“Give the check directly to your financial adviser and let them deal with the logistics of it,” he said. “We do it every day.”
The best way to roll over an IRA
The best way to roll over an IRA is trustee-to-trustee, as this type of transfer ensures that money won’t be withheld or be penalized 10% for an early distribution.
You can automatically avoid mistakes that lead to taxes and withholdings on distributions by electing for direct rollover or electing out of withholding in the case of a distribution from an IRA.
"And when you do roll over an IRA, be sure that your money is invested and not sitting in an IRA as a cash reserve as the return is low," Kalscheur said.
“At least you will have the money invested,” he said. “Don’t leave it in cash.”