What are the rules to do a rollover to an IRA?
- You can “roll over” money from one retirement plan to another.
- Most often, rollovers happen when you leave a job, and you roll over your retirement money over to your new employer’s 401k or to a Traditional IRA.
- As long as you move the money directly between similar plans, such as between two 401ks or a 401k and a Traditional IRA, you won’t owe any taxes.
Retirement plans, including Roth IRAs, Traditional IRAs and 401ks, can help you meet your savings goals. Sometimes you need you to shift money between two plans, either because you are changing jobs or because you want a different kind of tax break or more investment choices. You might also want to simplify by consolidating the number of retirement plans you have.
If you move money from one retirement account to another, it’s called a rollover. Many rollovers are tax free, but a few trigger tax consequences. Here are some of the most important questions if you are thinking about a rollover:
- What kinds of rollovers are allowed?
- How do you do a rollover?
- Do rollovers count against your annual contribution limit?
- How long do you have to complete a rollover?
- How many rollovers are you allowed in one year?
There are different kinds of retirement plans, and different rules for which you can do rollovers between. These three common types of rollovers are permitted and do not generally trigger taxes:
- A 401k to Traditional IRA rollver.
- A 401k to Roth IRA rollover.
- A Traditional IRA to a Roth IRA rollover.
You can check this chart to find out whether more complicated rollovers, such as those involving SIMPLE and SEP IRAs, are allowed and whether those rollovers trigger taxes. SIMPLE and SEP IRAs are two kinds of retirement plans commonly used by small businesses and the self-employed.
There are three ways to accomplish the rollover you’re planning. Each one has different implications.
- In a direct rollover, you ask your plan administrator, usually your human resources department at work, to help you transfer money to another plan. The plan could be another 401k at your next job, or an IRA at a bank or brokerage. The administrator may issue you a check made out to your new plan. Your rollover won’t be taxed in this scenario.
- In a trustee-to-trustee transfer, the money moves directly between accounts. Your rollover won’t be taxed in this scenario, either.
- In a 60-day rollover, the money from your retirement plan is paid to you. Taxes are automatically withheld. You can deposit all or a portion in an IRA or retirement plan. You must make the deposit within 60 days. If you want to maintain the level of retirement savings in your new account, you’ll have to use other funds to make up for the amount of taxes that were withheld.
Imagine that you receive a $20,000 distribution from your 401k plan. Your employer withholds $4,000. If you want to roll over $16,000, you will report $4,000 as taxable income, $4,000 as taxes paid and $16,000 as a nontaxable rollover. Then, in addition, you pay the 10% tax on early distributions.
But suppose you want to rollover the entire $20,000, but your employer has already withheld $4,000? You must make up the $4,000 from other sources, and count $4,000 as taxes already paid[OU1] .
If you chose to have the money distributed to you, you have 60 days from when you receive the money to when you must deposit it in the new account.
No. There are any limits for Traditional IRA contribution limits and Roth IRA contribution limits, but a rollover does not count against these limits. You can’t contribute more than $5,500 to your IRAs this year, or $6,500 if you are 50 or older.
You can read more about contribution limits here.
You can roll over as many times as you want in most scenarios, including rollovers from 401k plans to IRAs. You can also make as many conversions as you want from traditional IRAs to Roth IRAs. But you generally cannot make more than one rollover from the same IRA within a one-year period.
You also cannot make more than one IRA-to-IRA rollover in the same year. If you do, you must include the amount you rolled over in your gross income for the year. You may be subject to the 10% penalty tax on that amount.