IRA Rollover Rules and the 60-Day Limit

An IRA rollover is generally the transfer of assets between two, non-like retirement accounts, such as from a 457(b) to an IRA. IRA rollovers have specific rules depending on how the funds are transferred (directly or indirectly) and the type of account you are rolling from and into.

The 60-day limit refers to when a retirement distribution is paid to you: If you roll those funds within 60 days into another retirement account, you won’t pay taxes or an early withdrawal penalty on the distribution.

Why Make an IRA Rollover?

A rollover might be a pre-retirement distribution you receive from a former employer’s retirement plan, or it could be funds—partially or wholly—that you wish to roll over from another type of retirement plan, such as a 401(k), while you’re still in-service with your employer. A rollover inherently requires tax reporting. The IRS offers more details about rollovers in this chart.

You might do an IRA rollover, for example, while still working at age 60 for your current employer. Now that you meet the minimum age requirement for distributions, you can take an in-service withdrawal and roll it over into an IRA. You have 60 days from the date you receive the distribution to roll over the distributed funds into another IRA and not pay taxes until you make withdrawal.

Another instance where you would have a rollover: You leave your job, and since you only have between $1,000 and $5,000 in your 401(k), your employer has the right to roll the balance of your 401(k) on your behalf over into an IRA of their choosing. Those funds will continue growing tax-free until you withdraw them.

How to Start the Rollover Process

Starting the IRA rollover process depends on how the retirement plan distribution is being made: as a direct rollover or indirect (60-day) rollover.

Direct IRA Rollovers

A direct IRA rollover involves a pre-retirement distribution payment made directly from the retirement account at your former employer to a new or alternate IRA account. There are no IRS limits in the number of direct rollovers you can make in a year. Another form of direct IRA rollover involves directly moving assets between two like retirement plans (e.g., from one IRA to another IRA) and directly between two financial institutions. These transfers do not get reported to the IRS and again there is no limit to the number you can make in a year.

Indirect IRA Rollovers or 60-Day Rollovers

In this scenario, you receive a pre-retirement distribution directly, and you have 60 days to roll the funds into an IRA to avoid taxes and penalties on the distribution. However, under certain circumstances the IRS will waive the 60-day rollover rule.

Note that with this type of transfer, the IRA permits you to make only one 60-day rollover per year, even if the rollovers involve different IRAs.

What Types of Plans Can I Roll Over?

You can roll over from or to just about any type of retirement plan. The IRS Rollover chart provides details about which plans can be rolled to and from one another and also includes guidance on the annual limits on 60-day rollovers.

Essentially, you can roll over from:

  • IRA to IRA
  • Employer Plan to IRA
  • IRA to Employer Plan
  • Employer Plan to Employer Plan

Rolling Over Into an IRA

401(k) rollovers are one of the more common types of rollovers, involving rolling a 401(k) from a former employer into a new or existing IRA account. You can also roll over funds in 403(b) and 457(b) plans into an IRA.

You can choose whether to roll the funds into a traditional IRA or a Roth IRA. The difference is in how you’ll be taxed. With a rollover to a traditional IRA, taxes are deferred until you withdraw funds. With a Roth IRA, you’ll pay taxes up front on the rolled over amount.

Rolling Over Funds in a Traditional IRA to a Roth IRA

If you have a traditional IRA and wish to roll funds over to a Roth IRA, this is called a “Roth conversion.” You can do it by direct transfer, or indirect transfer. If your retirement plan has a Roth provision, you can do an in-plan Roth conversion, taking pre-tax assets and converting them to Roth assets in your employer-sponsored retirement plan.

No matter how you transfer the funds, since you paid no taxes on the contributions and earnings in the traditional IRA, you’ll need to pay taxes on those funds up front to roll into a Roth IRA. Keep in mind that the taxes you pay on rolling over to a Roth can be costly.

One IRA to Another IRA

There are two ways you can move assets between IRAs. One method is a trustee-to-trustee transfer. Transfers must occur between the same type of IRAs and are not reported to the IRS. The second way to move funds from one IRA to another is through a rollover. This also could be from one Roth IRA to another. This type of transaction is permitted by the IRS, but if you wish to roll over more than once, you’ll have to wait 12 months before moving funds from either of the accounts.

Are There Taxes and Fees Associated with IRA Rollovers?

You do not have to pay taxes on the IRA rollover itself, but you do have to report the rollover on your taxes. If, however, the rollover was from a traditional IRA (tax-deferred) to a Roth, you’ll also need to report and pay taxes on the funds (and associated earnings) that are rolling over.

Keep in mind that the 60-day rule applies in the case of an indirect rollover. If you reinvest your funds in another IRA within 60 days, your distribution isn’t taxed. If you miss the deadline, you will likely owe income taxes, and possibly penalties, on the distribution.

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