By Lee Sherman
You may think of your retirement accounts as untouchable, quietly growing your nest egg so that you can live off them when you retire. But there are times when rolling over the money into a new retirement plan can be beneficial. The trick is doing this without incurring any additional taxes or penalties.
A good time to consider a rollover is when you change jobs or are getting ready to retire. As long as you meet all of the requirements, you can move funds from your old employer-sponsored retirement plan, such as a 401(k) or 403(b), into an IRA of your choice. It lets you preserve the tax-deferred status of your retirement assets without having to pay current taxes or early withdrawal penalties at the time of the transfer. Transferring your money in this way can also provide you with other benefits or additional investment opportunities afforded by a different retirement plan.
According to the IRS, you’ve got 60 days to transfer the money before it is considered taxable. You can make this deposit yourself, or you can have your financial institution do it directly. If you don’t do this, you will have to pay tax on any distributions you receive. If for some reason, you decide to withdraw the money earlier, you may also have to pay additional tax unless you qualify for one of the exceptions to the 10% tax on early distributions.
You can also decide to do as investor Peter Thiel did and move your money into a Roth IRA. In this scenario, you are taxed upfront on any money you deposit, but after that, it grows tax-free, and with a Roth you won’t be taxed again when you make a withdrawal. While this wasn’t the original intent, many newly minted billionaires have used the Roth IRA in this way to grow their fortunes quickly.
How to Roll Over Your IRA
When the time comes for a distribution from your retirement plan, you can use direct deposit. Just ask your existing plan administrator to make the payment directly to another retirement plan or individual retirement account (IRA). Your distribution will typically come in a check payable to your new account, and you won’t pay tax on this amount.
With a trustee-to-trustee transfer, you ask the financial institution that holds your IRA to make the payment for you, and you won’t pay tax on this amount.
As long as you observe the 60-day rollover rule, you can deposit all or any of the distributions from an IRA or retirement plan that you receive directly. Unlike the other options, you will still have to pay taxes on these distributions.
Understanding the One Rollover per Year Rule
Generally speaking, you can only execute one IRA rollover per year. This rule applies to either a rollover to the same IRA or to rolling over the distributions you’ve already rolled over to yet another IRA. And it includes everything from traditional and Roth IRAS to SEP and SIMPLE IRAs. But there are exceptions to this limit which include:
- rollovers from traditional IRAs to Roth IRAs
- trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- plan-to-IRA rollovers
- plan-to-plan rollovers
Beyond this basic understanding of what you can roll over and when, you’ll want to work with your financial advisor to understand how rolling over your IRA can affect your retirement plan.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.