If you want to take money from your retirement accounts and put it into an individual retirement account (IRA) or another qualifying retirement account, you have to know the rollover IRA rules. Following these rules prevents you from spending unnecessarily on taxes, fees, and withdrawal penalties.
12 Rollover IRA Rules for Anyone with Retirement Accounts
1. You May Not Be Able to Roll Over 401(k) Funds to Your IRA While Still Employed
Some rollover IRA rules can impact your employer-sponsored plan. You can roll money from one of these, such as a 401(k), to an IRA, freely when you leave your employer. Many plans, however, do not allow you to do this type of transfer.
You, therefore, have to know if this works with your situation. Contact your human resources rep and ask about in-service distribution, which refers to a distribution when you are “in service” or employed by a company.
If your plan does not allow an in-service distribution, consider reducing how much you contribute to your 401(k) and instead put the money into Roth IRAs or traditional IRAs.
2. Your Plan Administrator Has to Withhold Taxes on Early Withdrawal
This is one of the rollover IRA rules to follow in case you want an early withdrawal.
Once you leave your job, you can take the money from your 401(k) and roll it into an IRA. If you ask your plan administrator to make the check out to you, as opposed to moving the funds directly into a new retirement account, they will automatically withhold 20%. This is for taxes, and goes directly to the IRS. Note, however, your actual taxes may be more or less than this amount.
3. You Can Avoid Taxation If You Deposit the Funds Within 60 Days
The tax explained above only applies if you take an early distribution of your funds. As long as you deposit the check into an IRA or into qualified retirement plans from your new employer, you do not have to worry about it.
At tax time, you will receive documents from the groups who manage your retirement accounts. When you give the information to your accountant or enter it into your tax prep software, it will ensure you get credited for any amounts that have been sent to the IRS.
4. A Direct Rollover Does Not Require Any Tax to Be Withheld
To prevent the plan administrator from withholding 20%, you need to request a direct rollover or trustee-to-trustee transfer.
In this situation, you make the distribution check to your new retirement account. You will not be able to cash this check. This check should be sent directly to the new plan administrator.
5. You Have to Report IRA Rollovers on Your Tax Return
If you do not want issues with the IRS, one of the rollover IRA rules is to inform the agency of your decisions.
Even if you do not owe any tax, you still must report the IRA rollover on your tax return. Your plan administrator should send you a 1099-R at the beginning of the year. Before filing your taxes, make sure the information on that form is correct. If you transfer mistakes from that form to your return, that can skew the amount of taxes you owe.
6. There Are Special Rollover IRA Rules for Rollovers Involving Company Stock
If your 401(k) has a company stock, you may only be able to roll that into a new account if you retire or leave the business. At that point, the plan administrator may move the stocks directly from the 401(k) into your IRA, or they may turn the stocks into cash first. This distribution is called a net unrealized appreciation (NUA).
7. You Can Roll After-Tax Contributions to Your Roth IRA
A Roth IRA is a bit different than a Traditional IRA. With a Traditional IRA, you deposit income before it is taxed. Then, when you withdraw the funds, you do not have to pay any income tax.
A Roth IRA follows the opposite rules. You deposit after-tax income, but you do not have to pay income tax when you make withdrawals.
This also affects rollovers. If you take funds from employer-sponsored retirement accounts, you can roll that into a Roth IRA, but you need to use after-tax funds. In other words, you have to pay all taxes and penalties on your withdrawal just as if you were withdrawing the funds to spend them. Then, you can deposit the remaining amounts.
8. You Can Roll Funds from IRAs to Employer-Sponsored Retirement Plans
When many people look at rollover IRA rules, they think about rolling funds from a 401(k) or another employer-sponsored retirement plan to an IRA.
What you may not know is that you can also take the reverse path. You can roll funds from your traditional IRA to an employer-sponsored retirement account.
To explain, imagine you have been self-employed for many years. You have quite a bit of money in your Traditional IRA. Then, you take a job that offers a 401(k) as a benefit.
You look over the plan, and you feel like it offers more benefits than your IRA. As a result, you decide to roll over the funds. You can do that, and your plan administrator can help with the details.
9. You Can Transfer Money from One IRA to Another IRA
This is another of the few basic rollover IRA rules to remember. You can move money from one IRA to another, although the exact term is not “rollover.” Instead, it is referred to as a transfer.
If you ask for the check to be made out to you, the plan administrator has to send 20% to the IRS for taxes and early withdrawal penalties. If you do a direct transfer, these funds will not be withheld.
10. You Can Temporarily Borrow Money from Your IRA with an Indirect Transfer
Although 20% is withheld when you do an indirect transfer, you can get those funds back when you file your tax return. As a result, you can essentially use an indirect transfer to temporarily borrow money. You simply need to ensure you deposit the funds into the new account within 60 days.
If you miss that deadline, you have to pay taxes on your withdrawal. Even if you put it into a retirement account on the 61st day, the IRS still looks at the situation as if you have made an early withdrawal. The only exception is if you are over the age of 59 1/2 years. At that age, you can make withdrawals without penalties.
11. You Do Not Have to Roll Over Everything
The rollover IRA rules do not require you to roll over everything in your account. If desired, you can roll over just a portion of the funds in your retirement accounts. It applies to rollovers from IRAs to 401(k)s, from 401(k)s to IRAs, and from IRAs to other IRAs.
12. You Cannot Roll Over Minimum Distributions
Did you or someone you care about turn 70 this past year? Right now, make darn sure you/they haven’t spaced on taking required minimum distributions from retirement accounts. https://t.co/4C62JPy5IL
— The Motley Fool (@themotleyfool) March 29, 2018
Once you turn 70 1/2 years old, you have to take minimum distributions from your retirement accounts. Typically, the amount of your distribution has to be a certain percentage of your retirement account.
Unfortunately, you cannot roll over these amounts into other retirement accounts, but you may be able to make other types of investments with the money. Note you can delay your minimum distribution requirements if you keep working full-time.
Do you have questions on other rollover IRA rules? Let us know in the comments section below.