12 month rule for 401k to IRA

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aaflygirl
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12 month rule for 401k to IRA

Post by aaflygirl » Tue Oct 08, 2019 4:42 pm

Are employer 401k rollovers to an IRA exempt from the 12 month rule? What about a lump sump pension from an employer to an IRA? Thanks for any help you can give me.

retired@50
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Re: 12 month rule for 401k to IRA

Post by retired@50 » Tue Oct 08, 2019 4:47 pm

aaflygirl wrote:
Tue Oct 08, 2019 4:42 pm
Are employer 401k rollovers to an IRA exempt from the 12 month rule? What about a lump sump pension from an employer to an IRA? Thanks for any help you can give me.
By the "12 month rule" can I presume you mean the annual contribution limits? If so, then yes, since rollovers aren't contributions in the current year, they represent contributions of years gone by.

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aaflygirl
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Re: 12 month rule for 401k to IRA

Post by aaflygirl » Tue Oct 08, 2019 4:59 pm

I mean the 12 month rule that says you can only do one rollover per 12 months per the IRS.

lakpr
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Re: 12 month rule for 401k to IRA

Post by lakpr » Tue Oct 08, 2019 5:02 pm

I think @aaflygrl is thinking about indirect rollovers that are limited to 1 every 12 consecutive months.

<< edit: never mind, only IRA to IRA transfer is subject to 12 month rule, @ ResearchMed is right >>

A more fundamental question is, why do you want to move away from 401k ? If the costs in the 401k plan are low, it might be better to leave funds in the plan instead of rolling over to IRA
Last edited by lakpr on Tue Oct 08, 2019 5:08 pm, edited 2 times in total.

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ResearchMed
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Re: 12 month rule for 401k to IRA

Post by ResearchMed » Tue Oct 08, 2019 5:05 pm

aaflygirl wrote:
Tue Oct 08, 2019 4:59 pm
I mean the 12 month rule that says you can only do one rollover per 12 months per the IRS.
That rule applies to IRA to IRA transfers and ONLY when it is not directly from one custodian to another (i.e., the rule applies when you take possession of the money during the transfer).

AFAIK, it does not apply to 401k to IRA.
But it is best to do a direct custodian to custodian transfer. Otherwise, you may be required to have tax withheld. (You'd be able to re-deposit the full amount into the IRA, but you'd need to cough up the tax amount from other money.)

RM
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Topic Author
aaflygirl
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Re: 12 month rule for 401k to IRA

Post by aaflygirl » Tue Oct 08, 2019 5:14 pm

You can't do a trustee to trustee if the money is coming from an employer's 401k or pension fund. Both of those are considered rollovers. I saw this online "Rollovers from employer plans to IRAs – Distributions from your employer retirement plans, such as a 401(k) aren’t subject to the once-per-year rollover limit" and wanted to verify that this is true. I called the IRS for clarification and they said to contact my financial planner for the answer. :D
I'm moving out of 401k because the options in it are extremely limited vs VG IRA. Thank you, ResearchMed. Looks like you answered my question....401ks are exempt from the rule. Thank you.

retiredjg
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Re: 12 month rule for 401k to IRA

Post by retiredjg » Tue Oct 08, 2019 5:20 pm

aaflygirl wrote:
Tue Oct 08, 2019 4:59 pm
I mean the 12 month rule that says you can only do one rollover per 12 months per the IRS.
No. Any movement of money that starts or ends with a 401k is not part of the "1 rollover a year" rule. What you are considering would be a "plan to IRA" rollover.

See this link.

https://www.irs.gov/retirement-plans/pl ... tributions

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ResearchMed
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Re: 12 month rule for 401k to IRA

Post by ResearchMed » Tue Oct 08, 2019 5:25 pm

aaflygirl wrote:
Tue Oct 08, 2019 5:14 pm
You can't do a trustee to trustee if the money is coming from an employer's 401k or pension fund. Both of those are considered rollovers. I saw this online "Rollovers from employer plans to IRAs – Distributions from your employer retirement plans, such as a 401(k) aren’t subject to the once-per-year rollover limit" and wanted to verify that this is true. I called the IRS for clarification and they said to contact my financial planner for the answer. :D
I'm moving out of 401k because the options in it are extremely limited vs VG IRA. Thank you, ResearchMed. Looks like you answered my question....401ks are exempt from the rule. Thank you.
But please do pay attention to that tax bit. If it's a big sum, it might be difficult to front that amount to re-deposit in the IRA, while waiting for a tax refund the next year (or other ways of handling that extra tax).
It's not a problem if the money is transferred directly from the Plan to the IRA custodian. No tax "must" be withheld.

RM
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TexasPE
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Re: 12 month rule for 401k to IRA

Post by TexasPE » Tue Oct 08, 2019 5:28 pm

lakpr wrote:
Tue Oct 08, 2019 5:02 pm


A more fundamental question is, why do you want to move away from 401k ? If the costs in the 401k plan are low, it might be better to leave funds in the plan instead of rolling over to IRA
I did a 401(k) to a split IRA/ Roth IRA rollover to separate my pre- and post-tax 401(k) contributions. My employer carried both in one account, but tracked the post-tax amount separately - rolling it over was easier to me than having to track the net pre-tax percentage every year when doing my RMD.
At 20: I cared what everyone thought about me | At 40: I didn't give a damn what anyone thought of me | Now that I'm 60: I realize that no one was really thinking about me at all | Winston Churchill (?)

Spirit Rider
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Re: 12 month rule for 401k to IRA

Post by Spirit Rider » Tue Oct 08, 2019 5:48 pm

aaflygirl wrote:
Tue Oct 08, 2019 5:14 pm
You can't do a trustee to trustee if the money is coming from an employer's 401k or pension fund. Both of those are considered rollovers.
That is a matter of semantics. Only direct moves of assets from like account -> like account can be performed by trustee -> trustee transfers. Trustee -> trustee transfers are not reported on Form 1099-R, while rollovers are.

Only traditional IRA -> traditional IRA and Roth IRA -> Roth IRA indirect 60-day rollovers are subject to the one IRA rollover per 12 month rule.

As pointed out by @ retiredjg. Traditional IRA -> traditional IRA and Roth IRA -> Roth IRA trustee -> trustee transfers, Roth conversions and any rollover with an employer non-IRA plan on either end of the rollover are not subject to the one IRA rollover per 12 month rule.

P.S. @ReseachMed makes a very important additional point. Indirect (60-day) rollovers of pre-tax amounts from a non-IRA employer plan to an IRA will require automatic 20% withholding. You will have to make up that 20% when redepositing the rollover into the IRA. You will get that 20% back when you file your tax return, but if you do not make up the 20% it will be subject to ordinary income taxes and a 10% early withdrawal penalty. So you always want to do a direct rollover

Note: It is a little confusing. Direct rollovers from a non-IRA plan (401k) to an IRA will almost always involve a check mailed to you for forwarding to the IRA custodian. The difference is in a direct rollover the check is made out your IRA custodian FBO your IRA account. Where in an indirect 60-day rollover, the check is made out to you, to be deposited in your account and then rolled over to your IRA account.

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Wiggums
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Re: 12 month rule for 401k to IRA

Post by Wiggums » Tue Oct 08, 2019 5:56 pm

Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

Trustee-to-trustee transfers between IRAs are not limited
Rollovers from traditional to Roth IRAs ("conversions") are not limited

Transition rule ignores some 2014 distributions

IRA distributions rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from a different IRA involved in the 2014 rollover.

Example: If you have three traditional IRAs, IRA-1, IRA-2 and IRA-3, and in 2014 you took a distribution from IRA-1 and rolled it into IRA-2, you could not roll over a distribution from IRA-1 or IRA-2 within a year of the 2014 distribution but you could roll over a distribution from IRA-3. This transition rule applies only to 2014 distributions and only if different IRAs are involved. So if you took a distribution from IRA-1 on January 1, 2015, and rolled it over into IRA-2 the same day, you could not roll over any other 2015 IRA distribution (unless it’s a conversion).

Topic Author
aaflygirl
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Re: 12 month rule for 401k to IRA

Post by aaflygirl » Tue Oct 08, 2019 7:23 pm

RM. The lump sum pension will be sent directly to me and I'm going to assume they will take the 20% tax out of it. Do I send a personal check with that lump sum check to VG for the IRA? How do I report that to the IRS so they know it was a rollover and not a withdrawal? I have no experience with this, so I appreciate your help.

Spirit Rider
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Re: 12 month rule for 401k to IRA

Post by Spirit Rider » Tue Oct 08, 2019 8:30 pm

aaflygirl wrote:
Tue Oct 08, 2019 7:23 pm
RM. The lump sum pension will be sent directly to me and I'm going to assume they will take the 20% tax out of it. Do I send a personal check with that lump sum check to VG for the IRA? How do I report that to the IRS so they know it was a rollover and not a withdrawal? I have no experience with this, so I appreciate your help.
You should instruct the pension administrator to do a direct rollover to the IRA custodian for benefit of your IRA. They routinely do this and it should not be a problem. As I indicated in my previous post. They will mail you a check made payable to the IRA custodian FBO your IRA. You should not accept a check made payable to you.

The employer/401k plan must allow a direct rollover under IRS regulation 26 CFR § 1.401(a)(31)-1 Requirement to offer direct rollover of eligible rollover distributions.

There is absolutely no reason to accept a lump sum distribution that will have automatic 20% withholding that you must make up or pay ordinary income taxes and a 10% early withdrawal penalty.

A direct rollover will be reported on your Form 1040, but with $0 taxable.

retiredjg
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Re: 12 month rule for 401k to IRA

Post by retiredjg » Wed Oct 09, 2019 7:16 am

aaflygirl wrote:
Tue Oct 08, 2019 7:23 pm
RM. The lump sum pension will be sent directly to me...
...but it should not be made out to you. It should be made out to your IRA fbo (for the benefit of) you. They send it to your last address on file, presumably to reduce someone moving your money without your knowing it.

....and I'm going to assume they will take the 20% tax out of it.
They should not withhold any tax because they are not distributing the money to you. They are sending it through you to your IRA.

Do I send a personal check with that lump sum check to VG for the IRA?
No. You send that check to VG.


I know this has all been said. I'm just saying it again so you'll hear it from more than one person. :happy

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