IRA rollovers and transfers

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IRA rollovers and transfers can be made from the following plans: [1]:

Types of transfers

Direct trustee-to-trustee transfers

You can transfer funds in one traditional IRA from one trustee directly to another, either at your request or at the trustee's request, through a direct trustee-to-trustee transfer. Because there is no distribution of assets to the plan holder, the transfer does not trigger the 10% early withdrawal penalty tax, and is tax free (an amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan). There is no withholding tax imposed on the transfer. You can execute an unlimited number of trustee-to-trustee transfers in a given year. If you are seeking to transfer a qualified plan, your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA. The plan is not required to give you this option if your eligible rollover distributions are expected to total less than $200 for the year. When executing trustee-to-trustee transfers prudence demands that you carefully monitor the transfer process to assure that the transaction is executed without error. [2]

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.” Unlike the direct trustee-to-trustee transfer process which bypasses the individual plan holder, a rollover is executed by distributing a paid out check to the plan holder who must then transfer the proceeds to a new retirement plan account. Rollovers have the following characteristics:

  • You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Failure to meet the 60 day requirement results in the distribution being taxable to the plan holder and triggers the 10% early withdrawal tax.
  • Generally, if an eligible rollover distribution is paid directly to you the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. Exceptions to the withholding requirement include a distribution totaling less than $200; or a distribution consisting solely of employer securities, plus cash of $200 or less in lieu of fractional shares. If one does not want to pay income tax or penalty tax on the 20% withheld for tax, one must use outside funds to tally 100% of the rollover. This would be considered an indirect rollover.
  • Conversely, if a distribution is made payable directly to the trustee of the rollover destination account (and actually rolled over), it can be treated as a direct rollover and not be subject to withholding. Note that Vanguard phone reps now refuse to execute direct rollovers in this form of a check payable to "Trustee FBO Account Owner" AND coding the transaction to show a direct rollover on the 1099. However this option remains on the IRA Distribution Kit paper mail-in form.
  • One is limited to only one rollover per year to or from the same IRA. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. (The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year.) [3]

Here is an IRS summary of allowable rollover transactions:

Rollover Chart[4]
IRS Rollover Chart.png
1Qualified plans include, for example, profit-sharing, 401(k), money purchase and defined benefit plans
2Beginning in 2015, only one rollover in any 12-month period. A transitional rule may apply in 2015.
3Must include in income
4Must have separate accounts
5Must be an in-plan rollover
6Any amounts distributed must be rolled over via direct (trustee-to-trustee) transfer to be excludable from income.
For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans.

Transfers incident to a divorce

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. There are two commonly-used methods of transferring IRA assets to a spouse or former spouse. The methods are:

  • Changing the name on the IRA. If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.
  • Making a direct transfer of IRA assets. Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse.

If your spouse or former spouse is allowed to keep his or her portion of the IRA assets in your existing IRA, you can direct the trustee to transfer the assets you are permitted to keep directly to a new or existing traditional IRA set up in your name. The name on the IRA containing your spouse's or former spouse's portion of the assets would then be changed to show his or her ownership. [5]

Rollovers/transfers to a Health Savings Account (HSA)

You can make a once in a lifetime rollover or transfer from an IRA to an HSA up to the annual HSA funding limit. This is usually not advised since you would lose the ability to contribute and take an HSA tax deduction for the amount you transfer, but it can be an emergency source of funds without paying taxes or penalties. See IRS Notice 2008-51. This is not advised if you live in a state that taxes HSA's (See HSA rollovers/transfers for more details.)

Rollover (Conduit) IRA

A large share of the Traditional IRA asset base is a result of employee rollovers of employer plan account balances to individually held IRAs. Individuals execute rollovers of plan assets when they change jobs or often, when they finally retire. This allows individuals to consolidate retirement assets into a single account, reduce costs, and expand investment options. These accounts are often termed Rollover or Conduit IRAs.

Prior to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, the only way for an employee to transfer assets from one employer plan to another was to establish an uncommingled Conduit IRA. Since passage of the act you can roll over part or all of the Conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if your retirement account includes qualified-plan balances that accrued before 1974, or if you were born before 1936, you may qualify for special optional tax treatment of lump sum distributions. These options include capital gains and forward averaging tax treatments. One must not commingle contributions or add funds from other sources to the Conduit IRA if you wish to preserve these options. [6]

One can also rollover employer plan assets into a Roth IRA. This is considered a conversion, and income tax will be paid on the amount transferred. If one is transferring assets from an employer plan including both regular 401(K) and Roth 401(k) assets, one can execute rollovers to both a Traditional IRA and a Roth IRA. If you are rolling over assets from an IRA into an employer provided plan you should keep in mind that a qualified plan can accept only pre-tax contributions; any portion of an IRA which has a tax basis cannot be rolled over. One can roll this tax basis portion of the IRA, tax-free, into a Roth IRA. [7]

If you own company stock in a retirement plan you may be able to take advantage of a special set of rules that allow you to pay only capital gains taxes on a significant portion of the distribution. See Net unrealized appreciation for fuller details.

Generally, assets held in ERISA plans enjoy greater protection from creditors than assets held in an IRA. See Asset protection:Investing in an IRA for considerations of asset protection when rolling over assets from an ERISA plan into an IRA.

Roth IRA

While a Roth 401(k) (as well as other equivalent eligible employer plans) can be rolled over into a Roth IRA, it is not possible to do the opposite, i.e., per the IRS, "a rollover from a Roth IRA to an employer retirement plan is not allowed."[8][note 1][9]

Notes

  1. Per the IRS: "You can roll over your IRA into a qualified retirement plan (for example, a 401(k) plan), assuming the retirement plan has language allowing it to accept this type of rollover. Roth IRAs can only be rolled over to another Roth IRA." IRA FAQs - Rollovers and Roth Conversions

References

  1. IRS Pub. 590, p.23.
  2. IRS Pub. 590, p.27.
  3. IRS Pub. 590, pp.24-27.
  4. Rollover chart, from the IRS, November 17, 2014.
  5. IRS Pub. 590, p.29.
  6. Appleby, Denise, Combining Your Plan Assets? Not So Fast! Investopedia
  7. IRS Pub. 590, p.65.
  8. IRS Pub. 590, p.70.
  9. Bogleheads Forum • Roth IRA to Roth 401k rollover not allowed 20 December 2011

External links