CFP

Distribution Rules, Alternatives And Taxation - Rollovers

Rollovers
A rollover is a tax-free distribution of cash or other assets to a plan participant, who then contributes the assets to another retirement plan. The contribution to the second retirement plan is called a "rollover contribution."

  1. Rollovers to a Traditional IRA – Allowed from the following types of plans:
  • Another traditional IRA
  • An employer's qualified plan
  • 457 plan
  • 403(b) plan
  • Rollovers from a Traditional IRA – A rollover into a qualified plan from a traditional IRA is allowed at the option of the plan sponsor.
  • 60-Day Time Limit on Rollovers – A taxpayer generally must make a rollover contribution by the 60th day after receiving a distribution from an IRA or an employer's plan.
    • WaiverThe IRS may waive the 60-day requirement in the event of a casualty, disaster or other event beyond the taxpayer's reasonable control. An automatic waiver will be granted if failure to meet the 60-day time limit is a result of a financial institution error, and very specific requirements are met.
    • Rollovers completed after 60 days – Amounts not rolled over within the 60-day limit are treated as a taxable distribution. They are taxable in the year distributed even if the 60-day period expires in the following year. A 10% early withdrawal penalty may also apply.
  • Withholding Rule – If an eligible rollover is paid directly to an individual, the payer must withhold 20% even if the individual plans to roll over distribution to an IRA. The 20% withholding may be avoided by choosing a direct rollover.
  • IRA-to-IRA Rollovers – An individual may withdraw tax-free all or part of the assets from one traditional IRA if they are reinvested within 60 days in the same or another traditional IRA.
    • One-year waiting periodAn individual may only make one tax-free rollover distribution from a traditional IRA within a 12-month period. There is also a 12-month waiting period of any amount distributed into another IRA.




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