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Retirement Plan To IRA
Under the tax laws, lump sum and certain other types of distributions
from qualified plans, 403(b) plans or governmental 457(b) plans
are eligible for rollover to an IRA. The plan administrator of any
such plan will let you know if a distribution is an eligible rollover
distribution.
For an eligible rollover distribution, an individual can then choose between a direct or indirect rollover. A direct rollover is much like a direct IRA transfer, in that funds or assets move directly from the plan to the IRA in the name of the IRA custodian or trustee. Amounts which are directly rolled over are not subject to federal income tax withholding.
Retirement Plan to IRA Indirect Rollovers
If the individual chooses to have the eligible rollover distribution paid personally (i.e., not go into an IRA), the plan administrator is required to withhold 20% from the distribution for federal income taxes before issuing the distribution. The IRA owner can still roll over an amount equal to the entire amount of the distribution, but must make up the 20% withheld with other funds to avoid being subject to tax (and possible penalties) on the amount not rolled over. Because of this, indirect rollovers generally are not desirable.
IRA to Plan Rollover
When the IRA owner desires to roll an IRA back to a plan, a distribution may be made from the IRA custodian or trustee to the IRA owner. The IRA owner then has 60 days to deposit the amount in a plan to avoid taxation and possible penalties. (The IRS may extend this 60-day period if the failure to complete the rollover in that time was beyond the control of the IRA owner.) The IRA custodian or trustee will treat this rollover as a distribution by reporting it on Form 1099-R. The receiving plan will report this to the IRS as an incoming rollover contribution.
The rollover can also be made directly from the IRA to the recipient plan. Either way, there is no mandatory federal income tax withholding, as there may be with distributions from retirement plans.
Conduit IRA
A conduit IRA is an IRA, which is funded solely from amounts attributable to a rollover from a qualified retirement plan, tax-sheltered annuity (403(b)) plan or governmental eligible deferred compensation (457(b)) plan and earnings on those amounts.
Recent changes to the tax laws permit plans to accept rollovers from IRAs funded with any type of before-tax contributions. However, many plans choose to accept rollovers from an IRA only if the IRA is funded exclusively with amounts rolled in from one of the plans mentioned above. For that reason, conduit IRAs are useful because they preserve an IRA owner's option to roll back funds into a plan that so limits rollovers from IRAs.
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