Rollover IRAs

At one time it was important to distinguish an account created by rolling out of a pension plan into a traditional IRA. Such accounts had to be designated Rollover IRAs and be kept separate from all other retirement accounts in order to preserve the right to be able to roll them back into a qualified pension plan in the future. That requirement has been eliminated, so that there is no longer a need to designate such accounts as Rollover IRAs, nor is there a need to keep them separate in order to have the opportunity to roll the amounts back to a pension plan. Today, therefore, the term Rollover is used as a verb to describe one method for moving monies out of a pension plan and into an IRA or from one IRA, SEP IRA or Roth IRA to another.

It is important to know the rules when you execute a Rollover or your retirement account. If you roll over your Traditional IRA, there are some common mistakes you must avoid. If you don't, you could face unnecessary taxes and penalties.

Important-60 day rule for receipt

After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. If you do not complete the rollover within the time allowed or receive a waiver or extension of the 60-day period from the IRS, the amount will be treated as ordinary income on your tax return to the IRS. That means you must include the amount as income on the first page of your tax return, and any taxable amounts will be taxed at your current ordinary tax rate. Plus, if you did not reach age 59.5 when the distribution occurred, you'll face a 10% penalty on the withdrawal.

Once a year limit

Within one year after you distribute assets from your IRA and rollover any part of that amount, you cannot make another rollover from the same IRA to another (or the same) IRA.

For example, imagine that you have two IRAs - IRAa and IRAb - and you make a tax-free rollover from IRA-a into a new IRA (c).

Within one year of the distribution from IRAa, you cannot make another tax-free rollover from IRAa or from IRAc into another IRA. However, you could roll money out of IRAb into any other IRA because you did not roll money into or out of that account within the previous year.

The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b) or 457(b) account within a year. Also, this one year limit rule does not apply to rollovers from Traditional IRAs to Roth IRAs, which are called Roth conversions). You are allowed to make tax-free rollovers from your IRAs at any age, but if you are 70.5 or older, you cannot rollover your annual Required Minimum Distribution (RMD). Therefore, if you are required take RMD each year, be sure to remove the current year's RMD amount from your IRA before actually rolling over.

Also, it is important to understand that whatever you roll out of one retirement account and into an IRA must be the same. For example, if you own a rental property in a pension plan or IRA and you roll it to an IRA the IRA must receive the same property (not cash if you sell it within the 60 days, nor another property or cash that you attempt to substitute for it). This also means that you cannot take cash distributions from your IRA or plan, purchase other assets with the cash, and then roll those assets over into a new (or the same) IRA. The IRS would consider the cash distribution from the IRA as ordinary income, and would not recognize the taxfree rollover.

The primary reason to use a rollover transaction or the rollover method to move money from one IRA to another is to expedite the movement of asset. Thats because a traditional transfer from one custodian to another can take anywhere from 1 to 6 weeks, which may be too long for you to capitalize on an investment opportunity. If you have no immediate plans for the use of the rolled-over assets or cash, then you should consider using the transfer method, instead of the rollover method. A transfer is non-reportable, and can be done for an unlimited number of times during any period.

What can you roll from?

While you can roll over funds from any of your own Traditional or Roth or SEP IRAs IRAs to a Traditional IRA, you can also roll over funds to your Traditional IRA from the following retirement plans:

A Traditional IRA you inherit from your deceased
A qualified pension plan
A Tax-sheltered annuity plan (or 403 (b) plan)
A Government deferred-compensation 457 plan

It is important to be aware that if amounts are rolled from qualified plans 403(b) plans or governmental 457 plans, and paid to you instead of processed as a direct rollover to an eligible retirement plan; the payer must withhold 20% of the amount distributed to you. Of course, you will receive credit for the taxes that were withheld. However, if you decide to rollover the total distribution, you will need to make up the 20% out of pocket. To avoid withholding, you should consider the direct rollover method to execute your rollover from your qualified plan, 403(b) plan or governmental 457 plan account. Such a direct rollover is reportable, but not taxable. In this method, the assets and/or cash are made payable to assigned to the receiving custodian FBO (For the Benefit Of) your name, IRA.