Rollover an IRA Without Paying Taxes
If your retirement plan provides distributions in the form of checks payable directly to you, 20% will generally be withheld for tax withholding purposes. If it remains unspent within 60 days it is considered income and subject to income tax (and possibly an early withdrawal penalty if under age 55).
Direct trustee-to-trustee transfers between IRAs do not count towards the one-IRA-rollover-per-year limit.
What is a rollover?
Rollovers are transfers of funds between accounts held with various financial institutions. Rollovers may either be direct or indirect. With direct rollovers, distribution checks are sent directly to your IRA custodian rather than to you and include both after-tax contributions as well as earnings; this form of rollover is tax-free.
An indirect rollover requires receiving a check made out to you with tax deductions deducted, and then having 60 days to redeposit it into your new IRA account. Otherwise, any funds left in your possession become taxable and an early withdrawal penalty might apply.
Rollovers between similar types of IRAs are restricted to once every calendar year; this does not apply for transfers between traditional IRAs and Roth IRAs or from employer plans into Roth IRAs.
How can I rollover my IRA?
If you receive a distribution from your retirement account, you have two choices for how you wish to deal with it: either to accept it as is or roll them over into another IRA account. Should you decide the latter is best for you, there are certain rules you must abide by in order to do so successfully.
Direct rollover occurs when your plan administrator sends you a check directly, usually along with a note or deposit slip that lists an account number and your name. Once received, you have 60 days to deposit the full amount into your new IRA provider in order to complete the rollover process.
An indirect rollover process is more complicated if your old 401(k) contains both Roth and pre-tax funds, since your employer may send separate checks for each “money type,” which you then need to deposit into their respective accounts. Furthermore, this form of rollover has one special rule which prohibits multiple indirect rollovers every 12-month period.
Can I rollover my 401(k)?
When rolling over your 401(k) into an IRA, any amounts actually rolled over will be taxed at ordinary income rates – whether direct or indirect rollover is used. A direct rollover allows your previous plan administrator to send a check directly to your new provider without subjecting you to mandatory federal withholding taxes of 20%; but in either case the same rates of tax apply regardless of how it’s accomplished.
Indirect rollovers, on the other hand, can be more complex. When receiving a distribution from your old retirement account, any funds received must then be deposited into a new IRA within 60 days – making working with a fee-only financial planner even more important to ensure you make an informed decision when rolling over money from one retirement account to another.
As with any financial decision, carefully considering the advantages and disadvantages of rolling over your 401(k) into an individual retirement account should be your goal. Consolidate accounts to reduce fees, expand investment choices and add greater estate planning protections.
Can I rollover my TSP?
TSP investors have many choices when it comes to rolling over their account to an IRA, including moving funds between accounts directly. But it is essential to consider the tax consequences before moving funds; for instance, rolling over from TSP to an IRA may result in additional income tax and incur an early withdrawal penalty of 10% if under age 59 1/2; additionally if receiving distributions directly without performing direct rollover, plan administrators withhold 20% to ensure taxes are paid as required.
The IRS 60-day rollover rule permits you to move a distribution from an employer retirement plan into an IRA without incurring income taxes or early withdrawal penalties, provided it lands in your IRA within 60 days of being distributed from TSP. However, under their rules a taxpayer is limited to making only one 60-day rollover during any 12-month period if all their IRAs have been converted.
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