Can You Roll an IRA Into Another IRA Without Penalty?
Direct rollover is the safest method of moving retirement account funds, as this way money never actually touches your hands. Indirect rollovers, however, could expose you to more tax complications, including income taxes and early withdrawal penalties.
Consideration should also be given to the one-rollover-per-year rule; otherwise, the IRS will tax any multiple distributions made within 12 months.
When moving money from a qualified retirement plan such as a 401(k) or 403(b), such as an employer-sponsored 401(k) or 403(b), into an IRA there are typically two methods to choose from when making this transition: direct or indirect rollover. A direct rollover involves having the assets directly distributed from plan administrator to new account custodian or trustee and never entering an individual’s hands, thus avoiding taxes or penalties that might otherwise apply. An indirect rollover typically results in receiving an individual check from plan administrator which must then deposited within 60 days else incurring taxes or penalties on her new account or else incurring taxes/penalties on both transfers.
The general rule for IRA rollovers states that you don’t need to include in your income any amount distributed from your original plan if it is then deposited within 60 days into another eligible retirement account, such as an IRA or employer-sponsored plan. Failure to meet this strict requirement could trigger taxation on all distributions made. It is crucial that you consult a financial professional when making rollover decisions.
Investing your retirement assets properly requires selecting an effective strategy tailored to your unique situation. A Thrivent Financial advisor can guide you through these choices to identify which option best meets your needs and help make an informed decision.
What Is Direct Rollover (DR)
A direct rollover refers to transferring your full retirement account balance directly from one plan (or an IRA) into another (or a rollover IRA). Since you no longer possess these funds during this process, they cannot be taken back or used for anything other than their intended use – making this method the preferred way to move retirement accounts between providers.
Direct rollovers are often employed when switching jobs, but they may also prove useful to retirees looking to consolidate multiple retirement accounts into one account – this helps lower account management fees and investment costs as well as simplify estate planning.
If your 401(k) distribution was a direct rollover, you should have received a Form 1099-R from your plan administrator. If for some reason this form has gone missing or misplaced, contact them immediately so you can request another copy. When filing Form 1040 with the IRS for reporting of this taxable distribution in each state has their own reporting and taxation rules so it would be wise to consult a H&R Block tax pro for assistance to make sure all the dots have been crossed correctly and taxes paid accordingly.
There are a number of mistakes to watch out for when conducting either direct or indirect rollovers, such as missing the deadline, mixing pre-tax with taxable amounts in one account, engaging in prohibited transactions or incurring early withdrawal penalties. But follow these simple guidelines and you can avoid costly errors:
Categorised in: Blog