IRA Rollover

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IRA Rollover

An IRA rollover moves retirement funds from one qualified account (for example, a 401(k) or 403(b)) into an individual retirement account (IRA) while preserving the tax‑deferred status of the money. Rollovers are commonly done after changing jobs or when you want broader investment choices or different account features.

Types of rollovers

Direct rollover (trustee-to-trustee transfer)

  • The plan administrator or custodian sends funds directly to the new IRA custodian.
  • Because you never take possession of the funds, direct rollovers avoid mandatory withholding and are the easiest way to prevent taxes or penalties.

Indirect rollover (60‑day rollover)

  • The plan or custodian issues a check to you or deposits the money into your personal account.
  • To avoid taxation and penalties, you must deposit the full distribution into a qualified retirement account within 60 days.
  • If the check was made payable to you, the plan sponsor generally must withhold 20% for federal income tax (you can recover withheld amounts when you file your tax return if you complete the rollover).
  • Custodians may also withhold from IRA distributions unless you opt out.

Key IRS rules and limits

  • 60‑day rule: Indirect rollovers must be completed within 60 days to remain tax‑free.
  • One‑per‑12‑month rule: You may make only one indirect (60‑day) rollover between IRAs in any 12‑month period. This restriction applies to IRA-to-IRA indirect rollovers only; it does not apply to direct transfers or rollovers from employer plans.
  • Direct transfers are not subject to the one‑year limit and avoid mandatory withholding.
  • Roth conversions (moving pretax funds into a Roth IRA) are permitted but are taxable events and not subject to the one‑year indirect‑rollover limit.

Tax and penalty considerations

  • Traditional IRAs and 401(k)s generally contain pretax funds; Roth IRAs and Roth 401(k)s contain after‑tax funds. Rolling between like account types (traditional→traditional, Roth→Roth) avoids immediate tax consequences.
  • Rolling pretax funds into a Roth IRA (a Roth conversion) triggers income tax on the converted amount.
  • If an indirect rollover is not completed within 60 days, the distribution is treated as taxable income and may be subject to a 10% early withdrawal penalty if you are under age 59½.
  • Roth contributions (the basis) can generally be withdrawn penalty‑free, but Roth earnings withdrawn before age 59½ and before a five‑year holding period may incur taxes and penalties.

Using the 60‑day rule as a short‑term loan

  • Some people use an indirect rollover as an interest‑free short‑term loan by withdrawing funds and redepositing them within 60 days.
  • This is risky: missed deadlines, withholding, or administrative errors can create taxable events and penalties. Use caution and document transfers carefully.

Why roll into an IRA?

  • Consolidation of accounts for simpler management.
  • Broader investment options (stocks, bonds, mutual funds, ETFs, and more) compared with many employer plans.
  • Access to IRA features and possibly lower fees or different advisory services.

Practical steps

Direct rollover
1. Contact the receiving IRA custodian and your current plan administrator.
2. Request a trustee‑to‑trustee transfer (direct rollover).
3. Confirm the receiving account details and monitor the transfer.

Indirect rollover
1. Notify your plan how you want the distribution paid.
2. If you receive a check, ensure you have the full amount available (account for mandatory withholding).
3. Deposit the full distribution into the receiving retirement account within 60 days.
4. Keep records of dates and amounts in case of IRS questions.

Common pitfalls

  • Missing the 60‑day deadline.
  • Exceeding the one indirect rollover per 12 months rule.
  • Rolling pretax funds into a Roth without preparing for the tax liability.
  • Failing to replace withheld amounts when completing an indirect rollover (requires using other funds to roll over the withheld portion).

Key takeaways

  • A direct (trustee‑to‑trustee) rollover is the safest way to move retirement assets without taxes or penalties.
  • If you handle the funds personally, you must complete the indirect rollover within 60 days and be aware of mandatory withholding and the one‑per‑12‑month limit.
  • Understand whether funds are pretax or after‑tax before rolling to avoid unexpected tax bills.
  • Keep clear records and coordinate with both custodians to ensure a smooth transfer.