What is an 'IRA Rollover'

An Individual Retirement Arrangement (IRA) rollover is a transfer of funds from a retirement account into a traditional IRA or a Roth IRA. This can occur either through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account.

BREAKING DOWN 'IRA Rollover'

IRA rollovers can occur from a retirement account such as a 401(k) into an IRA, or as an IRA to IRA transfer. Most rollovers occur when people change jobs and wish to move 401(k) or 403(b) assets into an IRA, but some occur when account holders simply want to switch to an IRA with better benefits or investment choices.

How to Do an IRA Rollover

To engineer a direct roller over, an account holder needs to ask his plan administrator to draft a check and send it directly to the IRA. In IRA-to-IRA transfers, the trustee from one plan sends the rollover amount to the trustee from the other plan.

If an account holder receives a check from his existing IRA or retirement account, he can cash it and deposit the funds into his IRA by himself. However, he must complete the process within 60 days if he wants to avoid income taxes on the withdrawal. If he misses the 60-day deadline, the Internal Revenue Service treats the amount like an early distribution.

Taxes for IRA Transfers

In direct transfers, there are no taxes withheld. Rather, the entire amount transfers directly from one account to another. However, if the account holder receives a check which he personally deposits into his IRA, the IRS insists upon a withholding penalty. Custodians or trustees must withhold 10% on checks from IRA distributions and 20% on distributions from other retirement accounts, regardless of whether or not the funds are earmarked for a rollover. At tax time, this amount appears as tax paid by the tax filer.

However, if an account holder receives a distribution from a Roth IRA to rollover into a traditional IRA, he does not have to pay any taxes on the distribution or report it as income, as distributions from Roth IRAs are not taxed.

Rules on IRA-to-IRA Rollovers

Many IRAs only allow one rollover per year on an IRA to IRA transfer. The one-year calendar runs from the time the distribution is made, and it does not apply to rollovers between traditional IRAs and Roth IRAs. Individuals who do not follow this rule may have to report extra IRA-to-IRA transfers as gross income in the tax year in which the rollover occurs.

RELATED TERMS
  1. Rollover IRA

    A rollover IRA is an account that allows for the transfer of ...
  2. Non-Spouse Beneficiary Rollover

    Non-spouse beneficiary rollover is performed in the event of ...
  3. Rollover

    A rollover may entail a number of actions, most popularly the ...
  4. Eligible Rollover Distribution

    An eligible rollover distribution is a distribution from one ...
  5. IRA Asset Will

    An IRA asset will is a document specifiying how the assets in ...
  6. Inherited IRA

    An inherited IRA is an account that is opened when an individual ...
Related Articles
  1. Retirement

    Avoid the Most Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules before rolling over an IRA.
  2. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  3. Retirement

    Tips for Properly Aggregating IRA Accounts

    When it comes to IRAs, there are times when they can be combined, or aggregated, and times when they can't. Here are some basic rules to follow.
  4. Retirement

    A Layman's Guide to Traditional and Roth IRAs

    Traditional and Roth IRAs have similarities and differences, but both help you save for retirement.
  5. Retirement

    Guide To 401(k) And IRA Rollovers

    Follow the steps detailed below when you need to roll over your 401(k) or IRA account to be sure you preserve tax benefits and avoid penalties.
  6. Retirement

    401(k) Rollover: Roth IRA or Traditional IRA?

    Here are the pros and cons of choosing to roll over your 401(k) into a Roth IRA and a traditional IRA.
  7. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
  8. Retirement

    Don't Make These Top 10 Mistakes on Your Roth IRA

    Don't lose out on the benefits of a Roth IRA by contributing too much, breaking rollover rules or making other avoidable errors.
  9. Financial Advisor

    Why Roth IRA Investors Tend to be More Aggressive

    New data from the Investment Company Institute highlights the differences between Roth and IRA holders.
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center