Can You Roll Over an IRA Without a Penalty?
Within 60 days of taking a distribution from an employer-sponsored retirement account such as a 401(k), you can use an IRA rollover to avoid income tax and an early withdrawal penalty. But the rules vary depending on how funds are transferred and which type of IRA it will go into.
Direct rollovers
Direct rollover is the process of moving funds between retirement accounts without third-party intervention, usually after someone leaves their job and wants to transfer any assets they’ve built up within their employer’s retirement plan (such as 401(k) or 403(b). Funds from one account are transferred directly into another one which could either be traditional or Roth based on individual circumstances.
To perform a direct rollover, an individual should contact their former plan administrator and request that any distributions be sent directly to their new IRA custodian. When receiving this distribution, their new custodian will process and invest it as available – receiving tax documents detailing any withholdings that may have taken place from their former plan administrator as part of this transaction.
Direct rollovers offer several advantages, with transactions typically completed within 60 days of being authorized by your plan administrator. Otherwise, distributions could become taxable and subject to early withdrawal penalties (unless one of the exceptions apply).
Indirect rollovers are used when an individual already has an IRA but is looking to transfer money from another account into it. They must coordinate with their new employer’s plan administrator in order to close out the old account and send its balance directly to their IRA custodian, who then manages it by investing it according to whatever investment options available in their firm.
An indirect rollover requires third-party involvement, so it can take longer than direct transfer. Furthermore, each taxpayer is limited to only making one indirect rollover each 12-month period regardless of how many IRAs they own.
Direct and indirect rollovers differ further by being reported to the IRS, while indirect transfer transactions represent regular distributions from an IRA that must be reported. Direct rollovers do not need to be reported to the IRS and can often be the preferred method for moving money between retirement accounts. Be mindful that any funds transferred between IRAs do not count towards your annual contribution limit; regardless of which type of account they end up in. Keep this detail in mind when considering each type of rollover. IRA custodians like Janus Henderson provide direct and indirect rollover services to enable individuals to transfer funds between accounts with minimal hassle – this ensures all contributions qualify for tax deductions. Speak with an IRA specialist for more details.
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