What Cannot Be Rollover Into an IRA?
Once a distribution from your retirement account arrives, it must be deposited into an IRA within 60 days or it will be considered withdrawal and subject to tax and an early withdrawal penalty of 10%. If not done so promptly, these taxes could become due along with an early withdrawal penalty of 10%.
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What Can’t Be Rolled Over?
General, you may be eligible to transfer funds from workplace retirement plans into an IRA without incurring taxes or early withdrawal penalties, with certain exceptions and some important rules you should keep in mind.
One rule states that you can only conduct one direct rollover within any 12-month period between different types of IRAs – Roth IRAs, traditional IRAs, SEP IRAs and SIMPLE IRAs – this includes Roth, traditional, SEP and SIMPLE accounts.
IRAs tend to offer lower fees than workplace retirement plans and offer more investment choices; depending on your tax situation, consolidating retirement savings into one may make sense.
Before rolling over your IRA, consult with a financial advisor to determine which type of IRA best meets your needs. For instance, if you anticipate entering a higher tax bracket in the near future, rolling your funds over into a Roth IRA may not be recommended.
Same-Property Rollovers
Rollovers of retirement account distributions can provide an effective, tax-free method to move money from one pre-tax account to the next, but it’s essential that you understand all of their associated rules first before initiating one – one wrong step could result in a costly tax bill!
Tax Court cases highlight some of the complexity surrounding IRA rollovers. In one such instance, actor James Caan’s estate attempted to consolidate two traditional IRAs into one account by merging different distributions from each IRA – something which violated several rules related to rollovers such as one-rollover-per-year and same property rules.
The same property rule mandates that, if your IRA receives a distribution of property such as real estate, notes, tax liens and precious metals as well as cash, this must be transferred directly into another IRA within 60 days or it becomes taxable income and potentially subject to early withdrawal penalties. Direct transfers remain the preferred way of moving funds between accounts.
Indirect Rollovers
Indirect rollovers require you to personally take custody of funds withdrawn from a retirement plan and deposit them directly into a pre-tax retirement account within 60 days. Income taxes must be withheld from each withdrawal in this type of rollover transaction or else additional taxes and penalties will apply.
Direct rollovers – also referred to as trustee-to-trustee transfers – enable you to avoid tax withholding by having your account administrator transfer money directly between retirement accounts. This method is often the preferred one since it eliminates the need for you to manage money yourself. Indirect rollovers are less desirable as they could expose you to additional tax complexities should they fail to abide by either the same-property rule or 60-day rule, creating more time consuming processes and potentially incurring penalties under these rules if failing either rule. Therefore it should only be used as a last resort as using them frequently can create complications and lead to potential tax penalties equalling income tax plus 10% early withdrawal penalties.
Taxes
An IRA can provide a safe place to store pre-tax funds from former employers or post-retirement distributions from 401(k) and 403(b) plans; however, failure to adhere to IRS rules could expose these funds to taxes as well as potential early withdrawal penalties of 10% or even higher.
Rule are complex, so a financial professional or tax advisor might be necessary to ensure you’re adhering to them correctly. One key rule that should be kept in mind is the “one rollover per year rule,” which covers direct and indirect rollovers.
Direct rollovers involve your old plan transferring its distribution directly into your new IRA; with indirect rollovers, however, your former employer sends you a check that must be deposited into your new IRA within 60 days or it will be considered a taxable distribution (and any withholding will apply). Trustee-to-trustee transfers may help avoid withholding restrictions; however, there’s still the one rollover-every-12-months cap to consider.
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