IRA to IRA Transfers
An IRA to IRA transfer occurs when the trustee of one retirement account transfers funds directly into another without incurring taxes or penalties.
Indirect rollovers require you to personally take possession of funds and deposit them within 60 days into a new IRA, including paying any applicable early withdrawal penalties (up to 10% in some instances). Failing to do this could have serious tax repercussions – including an early withdrawal penalty charge of 10%!
Direct rollover is the preferred method for moving funds between IRAs. When performed properly, funds move from one custodian to the next without taking possession of them; this transfer method is known as trustee-to-trustee transfer and may help avoid taxes and penalties; however, one rollover per year applies equally across traditional, SIMPLE, and SEP IRAs.
Indirect IRA rollovers can be more complicated than direct IRA transfers and may involve different tax considerations; you should consult a professional before taking this route. But indirect IRA rollovers may be ideal if you want to switch retirement accounts for better deals or are seeking new investment managers.
There is a once-per-year limit
If you are moving money between IRAs, there are some rules you should keep in mind when moving it from one account to the other. These include the once-per-year limit and contribution limitations. A direct rollover may be your most efficient method for moving funds between accounts.
Direct rollovers allow you to avoid taxes and penalties by sending a check directly from your old custodian to your new IRA custodian. Indirect rollovers, on the other hand, are considered taxable events.
The annual rule applies to all of your IRAs – Roth and traditional, as well as distributions from company retirement plans like 401(k). It does not, however, cover SIMPLE or SEP IRAs.
Important to keep in mind is the once-per-year rule applies only to direct transfers between IRAs. Even so, it is still recommended to seek advice from a tax professional prior to initiating such transfers as violating this rule can have serious repercussions.
There is a lifetime limit
Contributions made outside of a rollover count towards your annual contribution limit; this includes both regular contributions and rollover contributions from former employer’s retirement plans into an IRA. However, indirect rollovers could incur taxes depending on how they were transferred out.
This rule applies to any and all IRAs you own, including Traditional, SEP and SIMPLE accounts. To prevent indirect rollovers from taking place within 60 days of receiving distribution from an old account, directly deposit the money directly into the new one instead. This avoids an early withdrawal penalty and income tax bill on those funds; but whenever possible it should be avoided as this transaction could create unnecessary complexity in your retirement savings strategy; consulting a professional tax advisor could assist in developing more appropriate strategies.
There is a rollover limit
Keep this rule in mind when transitioning assets from your workplace retirement account into an IRA. If you do more than one indirect rollover within 12 months, the IRS will treat them as distributions and tax them accordingly as well as apply an early withdrawal penalty of 10% – but note that this rule does not apply for Roth conversions and trustee-to-trustee transfers.
Indirect rollovers involve taking a distribution from an old employer-sponsored retirement plan and depositing it directly into an IRA. Usually, plan administrators will liquidate assets before sending you a check with 20% withheld for taxes – you are then responsible for depositing this amount in your IRA within 60 days.
Failing to do this will result in a taxable distribution that must be included as part of your gross income and subjected to the 10% early withdrawal penalty, in addition to paying tax on investment gains accumulated during that time. You could avoid these costs altogether by moving funds directly into an IRA that holds only pretax contributions.
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