Be Sure not to forget these IRA Rollver Rules and Tax Implications!
Understanding the short- and long-term tax implications of rollovers from employer-sponsored retirement plans is a critical component of retirement planning.
That's because while employer-sponsored retirement plans and IRAs are designed to help you to build a retirement nest egg, not understanding rollover regulations can lead to unintended tax consequences that chip away at retirement savings.
Information on this site can answer basic rollover questions such as
• When are rollovers permitted from employer-sponsored plans
• How to properly manage eligible rollover distributions
• What are the rules covering rolling one IRA to another
Also available is more detailed information including
• IRA distribution rules
• Dividends and capital gains tax rates
• Required minimum distribution regulations
Use this site to educate yourself about how you can effectively manage your rollover funds and contact your financial representative and tax accountant to talk about the IRA rollover approach that suits your financial situation.
Frequently Asked Questions
What is an IRA Rollover?
An IRA Rollover is a tax-free transfer of funds from a tax-deferred plan, such as a 401(k) plan, to a traditional IRA. An IRA Rollover occurs when an employee changes jobs and is entitled to a distribution from the old employer's 401(k) plan. By doing an IRA Rollover, the funds can be transferred tax-free to the employee's own IRA. This means the funds can continue to grow on a tax-deferred basis inside the IRA. It also means that the funds are under the control of the employee with respect to investment decisions and future distributions.
The term "IRA Rollover" can also be applied to a transfer of funds from one IRA to another IRA. This too can be done on tax-free basis under a different set of rules that apply to IRA-to-IRA rollovers. Those rules are covered separately.
IRA Rollovers from Employer-Sponsored Plans
When is an IRA Rollover permitted for distributions from an employer-sponsored plan?
An IRA Rollover is permitted for any "eligible rollover distribution" from an employer-sponsored plan. This includes distributions from 401(k) plans when an employee changes jobs or retires, but also includes eligible rollover distributions from other employer-sponsored plans, such a qualified pension and profit-sharing plans, defined benefit plans, 403(a) annuity plans, 403(b) annuity contracts and governmental 457 plans.
What is an "eligible rollover distribution" from an employer-sponsored plan?
Any distribution, whether all or less than all of the employee's account, is an eligible rollover distribution, except for the following:
• Any distribution which is part of a series of substantially equal periodic payments;
• Any required minimum distributions;
• Any distribution which is made upon hardship of the employee;
• Certain returns of elective 401(k) contributions, corrective distributions, loans treated as distributions, and similar items.
When are distributions permitted to an employee from a 401(k) plan or other employer-sponsored plan?
Distributions from a 401(k) or other employer-sponsored plans are governed by IRS rules as well as the terms of the plan. In general, plan distributions require a triggering event, such as:
• Termination of employment
• Attainment of the plan's normal retirement age
• Death
Check with the plan administrator to be sure that the employee is entitled to a distribution under IRS rules and the terms of the plan and to determine what procedures are used to request such a distribution.
How are IRA Rollovers from employer-sponsored plans accomplished?
The employee usually has a choice of two methods to accomplish the IRA Rollover - the direct rollover or the indirect rollover.
Direct Rollover
In a direct rollover, which is also sometimes called a "plan-to-plan transfer," the eligible rollover distribution that is transferred directly by the employer-sponsored plan to the employee's IRA. The funds are never actually transferred to the employee individually.
Indirect Rollover
Under the indirect rollover method, the employer-sponsored plan writes a distribution check to the employee, who then deposits the check in his or her own account. The employee then has 60 days to transfer all or a portion of the amount received in the distribution to an IRA. The distribution is not taxable to the employee if the transfer occurs within 60 days.
