Rollover Methods
As a rule, no matter the method, ALL rollovers must be deposited in a retirement account in the same form as distributed, i.e., for a cash distribution, the participant must deposit cash; for a distribution of stock, the participant must deposit the exact stock. Amounts not rolled over are generally considered taxable income.
Tax free withdrawals can be taken for all or part of the assets from an IRA if reinvested within 60 days of receipt into the same or another IRA. The distribution cannot represent any portion of the Required Minimum Distribution payable for the year or come from an IRA that has already had a distribution made and rolled over within the last 12 months.
*The term "IRA" as used here refers to a Traditional, SEP or SARSEP IRA.
From a SIMPLE IRA to another SIMPLE IRA - Tax free withdrawals can be taken for all or part of the assets from a SIMPLE IRA if reinvested within 60 days of receipt in the same or another SIMPLE IRA.
Two Year Rule - Begins on the first day on which contributions made by the participant or his/her employer are deposited in his/her SIMPLE IRA account.
- Prior to 2-year period - Distributions made from a SIMPLE IRA must be contributed to another SIMPLE IRA. If this rollover distribution is also an early distribution, the additional tax is increased from 10% to 25% of the amount distributed.
- After the 2-year period - Movement of cash/assets in a SIMPLE IRA can be rolled over to into a Traditional IRA, Qualified Plan or 403(b) account with no additional tax unless it's an early distribution.
Acquired through Divorce - This is NOT considered a rollover transaction. This distribution type is for people who have divorced or separated, and the IRA assets must be transferred to a spouse as part of a settlement.
Inherited IRAs - If a surviving beneficiary inherits a Traditional IRA from his/her spouse, then generally a rollover can take place into a Traditional IRA established for them. The surviving spouse can also elect the "Treat as Own" option if he/she is the sole beneficiary on the account.
If a Traditional IRA is inherited from someone other than a spouse, a rollover CANNOT occur into the surviving beneficiary's account. The applicable distribution rules must be followed.
From a Qualified* Plan - If a participant receives an eligible rollover distribution from his/her (or a deceased spouse's) employer's qualified pension, annuity plan or tax-sheltered annuity plan (403(b) plan), a rollover of all or part of the distribution can be made into a Traditional IRA. Participants may rollover Qualified employer plan distributions as often as they are eligible. Therefore there are no limitations regarding the number of times a direct rollover occurs.
*The term "Qualified Plan" as used here refers to a Money Purchase, Profit Sharing, 401(k) and ESOP plans.
Ineligible rollover distributions include:
A Required Minimum Distribution
Hardship distributions from a 401(k) plan and certain 403(b) plans
Any of a series of substantially equal periodic payments
An indirect rollover is when a participant takes physical receipt of a distribution in cash or assets from an individual retirement account and then re-deposits some or all of the amount distributed into another IRA within 60 days of receipt of the distribution to avoid tax consequences.
In the case of an indirect rollover from a qualified plan, amounts paid directly to the employee are subject to mandatory withholding at a rate of 20%, even though the full amount of the distribution can be rolled over into another IRA to avoid tax consequences, if completed within 60 days of receipt of the distribution.
It is important to remember that these distributions can be exempt from the 20% mandatory withholding only if the employee requests a direct rollover to an IRA or another qualified plan.
In the case of a direct rollover, the distribution and rollover are handled directly between two institutions (employer and receiving custodian). In this instance, participants instruct employers to transfer assets, cash and/or securities directly into their Traditional IRA.
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