Can You Roll an IRA Into Another IRA Without Penalties?
One of the easiest and most efficient ways to transfer retirement funds between accounts is via a rollover. This involves receiving a pre-retirement distribution and depositing it within 60 days into an IRA so as to avoid taxes and penalties.
One option available to you is trustee-to-trustee transfers; however, the IRS only allows one 60-day indirect rollover per year.
Direct rollovers
A direct rollover allows you to transfer funds directly from a former employer’s retirement account into a new IRA without incurring taxes or penalties, eliminating the chance for errors that could incur taxes and penalties as well as hinder your tax-deferred savings opportunities. When making this transition between traditional or Roth IRAs, direct rollover is the simplest approach.
Direct rollovers offer one major disadvantage – inability to make changes until the transfer has completed – making them inconvenient for investors who require access to funds quickly. There are other alternatives, however, such as indirect transfers or IRA-to-IRA transfers, each of which have unique advantages and disadvantages – be sure to consult a financial advisor or tax professional when choosing which funding method best meets your needs.
Indirect Rollovers
Indirect rollovers allow you to transfer money from one IRA into another without paying taxes or penalty fees, provided you complete it within 60 days from when you received the distribution from the original plan or IRA. This timeline starts when either 1) you receive your check (for distributions paid via check) or 2) when funds have been deposited into the new account using either ACH or wire transfers (ACH/wire). Failing this deadline could result in your distribution becoming taxable income and early withdrawal penalties may apply (unless one of several exceptions exist).
If you are using an indirect rollover, be aware of your 12-month limit for making one direct rollover between IRAs in a 12-month period – this applies to Roth, SEP and SIMPLE accounts alike – however there may be exceptions granted by the IRS on an individual basis.
Transferring Funds Between IRAs
Similar to direct rollovers, indirect IRA transfers allow funds to move between any two IRAs that share the same tax status (e.g. pre-tax to pre-tax or Roth to Roth). There are no restrictions or annual limitations for indirect transfers between IRAs.
Direct and indirect rollovers provide several additional advantages beyond avoiding penalties, including tax savings and fees savings if assets are moved from pre-tax 401(k) into a pre-tax IRA or Roth IRA to Roth IRA, respectively. An indirect rollover can also help track savings balances easily in one online location by linking your accounts with low-cost online brokers or robo-advisors that meet NerdWallet’s ratings methodology for these providers (ie accounts fees/minimums/investment choices/mobile app capabilities/customer support etc), making tracking savings balances simple! For more details see NerdWallet’s ratings methodology on robo/advisors/online brokers ratings methodology as well as how we score these providers on our ratings methodology pages!
Categorised in: Blog