Can You Rollover an IRA Without Paying Taxes?
Rollover your distribution from an employer-provided retirement plan or an IRA into another retirement account without incurring taxes, but timing is of the utmost importance when doing so.
The 60-day rule mandates that you redeposit any distribution within 60 days to avoid creating a taxable event and ensure the minimum tax liability. Each IRA institution has their own procedures to follow for depositing funds back.
Direct rollovers
Direct rollovers provide the simplest method of moving retirement savings between accounts. This transaction allows funds to move directly from one IRA or employer retirement plan into another without creating taxable events or incurring penalties; by contrast, indirect transfers require you to comply with IRS rules; it’s crucial that when considering moving assets between IRA accounts that you understand these two forms of transaction so as to avoid incurring tax penalties and any potential IRS fines.
What Is Direct Rollover? Direct rollovers allow you to transfer money from an IRA or employer retirement plan with one custodian directly into another IRA with that same custodian, often done by asking your new IRA administrator or provider of choice (usually via check) “for the benefit” of you (ie not directly deposit). In many instances they also require some basic identification information from you so they can locate your account on their system.
Contrary to traditional IRAs, which only permit rolling over certain eligible investments into new accounts, employer retirement plans typically permit participants to roll all investment options available within their old plan into an IRA directly – this means a direct rollover is often the only means of moving money from former employer plans into their IRAs.
Direct rollovers may also be beneficial when looking to circumvent a 60-day clock rule that applies to indirect rollovers as well. Under this regulation, any distribution must be transferred within 60 days from being made in the original account, otherwise you’ll incur income taxes and potentially penalties on it.
There are certain exceptions to this rule, such as for individuals aged 73 or over who must take their required minimum distribution (RMD) this year. If you’re 75-year-old in such a circumstance and wish to roll over their RMD, follow more complicated indirect rollover rules instead.
One other advantage of direct rollovers is that they do not create any tax events. Normally, when receiving distributions from an IRA or retirement plan, your original fund custodian withholds taxes from them; but if you complete a direct rollover within the required time frame, they don’t need to withhold anything from them anymore.
Transferring your IRA triggers a tax reporting event; depending on how it moves, your new IRA institution will issue an IRS Form 1099-R, Distributions From Pensions Annuities Retirement Or Profit-Sharing Plans IRAs Insurance Contracts And Other Non-Qualified Plans in order to report this transaction; with direct rollovers however no such forms exist such as Form 5498 “IRA Contribution Information”.
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