Can You Partially Rollover an IRA?
The IRS does not tax distributions from retirement plans that are transferred directly into accounts with identical tax treatment within 60 days, such as moving pre-tax money from one plan into a traditional IRA – this event would not be subject to tax.
People sometimes opt for partial rollovers when leaving employer-sponsored retirement accounts in order to take advantage of penalty-free access at age 55. This article will examine whether this option is feasible.
Taxes
As part of retirement planning, shifting money between plans is known as “rollover.” To properly navigate a rollover transaction, it’s vital to understand its tax ramifications; otherwise you could incur penalties or tax bills in the form of fines or bills from Uncle Sam. Consult a financial planner prior to making any significant moves.
One reason to convert an entire company plan into an IRA may be gaining access to investment options that are only available within workplace plans, such as institutionally priced investments and customized plan options. But when doing a partial rollover, it is essential that you know exactly which accounts will remain and any applicable taxes.
Direct trustee-to-trustee transfers provide the simplest method for partial rollover. This means your original financial institution sends a distribution check directly to the new one that’s opening your IRA, eliminating 20% mandatory withholding that would otherwise apply. Alternatively, an indirect rollover could involve depositing it into a personal checking account before writing out another check for your IRA; but this process requires more work and requires longer to complete.
Partial rollovers
Many retirees want to transfer some of their 401(k) funds into an IRA, which typically offers greater investment options and often has lower fees than company retirement plans. Unfortunately, some plan administrators take an all-or-nothing approach and do not allow partial rollovers.
Taxwise, it is crucial that any money that you transfer lands in an account with similar treatment as its original retirement account. For instance, if you had a traditional pre-tax 401(k) at your former employer and moved it over into a traditional pre-tax IRA without incurring taxes for moving any funds over; but if it had been converted from Roth to Traditional treatment it may result in after tax contributions being distributed and subject to additional taxes due.
If you decide to perform a partial rollover, be mindful not to miss the 60-day deadline in order to avoid incurring a 10% early distribution penalty. When receiving your eligible rollover amount from your former employer, check Box 2a of their check for whether taxes were withheld from it, as this indicates tax withholding needs to be done within 60 days in order to avoid incurring this fee.
Indirect rollovers
Indirect rollovers occur when an account holder receives money from one retirement account to contribute back into another account – either via check or electronic transfer. They must deposit it within 60 days for taxes and penalties to avoid paying additional tax obligations or fees.
The 60-day rule is the cornerstone of indirect rollovers. Absent an exception, any funds not re-deposited to their new retirement account within this window are considered distributions and should be included as income for that year; any accounts under age 59 1/2 may also incur an early withdrawal penalty of 10%.
There are many advantages to indirect rollovers, including being able to avoid tax withholding and consolidate savings more effectively. However, it’s essential that investors understand all of the governing regulations and potential taxation implications associated with such transactions. Individuals considering indirect rollovers should carefully consider all their options and seek professional advice in deciding the most appropriate route for them. True Tamplin is an accomplished author, public speaker and founder of Finance Strategists – a financial education site dedicated to personal finances. He has published numerous articles covering subjects related to investing and personal finances for Forbes and Entrepreneur blogs and forums, among other media.
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