What is a Rollover IRA?
To permit tax-free transfers of retirement savings from one type of investment to another, as well as to increase the portability of qualified plan rights for employees moving from one job to another, Congress included a complicated web of rollover provisions in ERISA. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans. An IRA may also, under limited circumstances, make a rollover distribution to a health savings account (HSA). In other words, if you receive a distribution from a qualified plan, you might decide to put some or all of the distribution amount into an IRA. The IRA that receives the qualified plan distribution is called a rollover IRA.
Can I rollover funds from a Traditional IRA to another Traditional IRA?
A distribution from an IRA to the individual for whose benefit the account or annuity is maintained is not taxable to the recipient if reinvested within 60 days in another IRA (other than an endowment contract) for the benefit of the same individual. The rule operates on an all-or-nothing basis. The entire amount received from the old IRA must be transferred to the transferee IRA. If anything is held back, the rollover rule does not apply, and everything received from the old IRA, including any amount transferred to another IRA, is treated as a taxable distribution. However, the distribution from the old IRA need not include the taxpayer’s entire interest. An IRA can be split, for example, by rolling a portion of it into a new IRA.
If property other than money is received from the old IRA, that property, not substitute property of equal value or the cash proceeds of the property’s sale, must be included in the transfer to the new IRA. According to the Tax Court, the rollover contribution must be of cash if the distribution is in cash.
The privilege of rolling over from IRA to IRA may be exercised only once in a 12-month period.
Can I rollover funds from a qualified plan (401(k) Plan) to a Traditional IRA?
Very generally, a qualified plan or annuity participant can roll over any distribution other than a distribution that is part of a series of payments over the distributee’s life or life expectancy or over a fixed period of at least 10 years, a distribution required by the minimum distribution rules of Internal Revenue Code Section 401(a)(9) , or a hardship distribution. An employee’s surviving spouse may also roll over a similar distribution received on account of the employee’s death.
Can I rollover a Traditional IRA I inherited?
A taxpayer whose interest in an IRA is as beneficiary of the person who created the IRA is generally denied the privilege of rolling over tax free from the IRA to another type IRA or a qualified plan or tax-deferred annuity, except that a surviving spouse may roll over to another IRA but not a qualified plan. Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse, Congress decided it was inappropriate to allow the tax exemption to be prolonged by rollovers after the contributor has died and the account has passed into the hands of a person other than a surviving spouse.
What are the Rollover rules for Roth IRA?
The contribution limitation does not apply to a “qualified rollover contribution,” but no rollover contribution other than a qualified rollover contribution is permitted. The term “qualified rollover contribution” includes only the following:
- A rollover contribution from another Roth IRA.
- A rollover contribution from a traditional IRA that satisfies the requirements for a rollover from one traditional IRA to another.
- A rollover contribution from a qualified pension, profit-sharing, stock bonus, or annuity plan (qualified plan), tax-deferred annuity, or eligible deferred compensation plan that satisfies the requirements for rollovers from the particular type of plan.
- A contribution to a Roth IRA by an individual who has received a military death gratuity.
A qualified rollover must satisfy all of the requirements for rollovers of and into IRAs generally, which means, for example, that a rollover contribution must made within 60 days of the rolled-over distribution and the rollover privilege is denied to beneficiaries of IRA owners (other than surviving spouses). For years beginning before 2010, an individual may not make a qualified rollover from a traditional IRA, qualified plan, tax-deferred annuity, or eligible deferred compensation plan to a Roth IRA for his or her benefit if his or her adjusted gross income for the year exceeds $100,000.
Who qualifies for a rollover from a Traditional IRA to a Roth IRA?
Starting in 2011, everyone qualifies to convert to a Roth IRA. As with any rollover, you will want to arrange a direct rollover from the plan to the Roth IRA to avoid mandatory income tax withholding and not worry about the 60-day window which the transfer must be completed.
Do I pay tax when I rollover a Traditional IRA into a Roth IRA?
Yes. A distribution rolled over to a Roth IRA from a traditional IRA, qualified plan, tax-deferred annuity, or eligible deferred compensation plan is included in gross income (although not adjusted gross income for purposes of the $100,000 ceiling). A traditional IRA can be converted into a Roth IRA, but the conversion is treated as a distribution from the traditional IRA and a rollover contribution to the Roth IRA.
Starting in 2010, everyone qualifies to convert to a Roth IRA. As with any rollover, you will want to arrange a direct rollover from the plan to the Roth IRA to avoid mandatory income tax withholding and not worry about the 60-day window which the transfer must be completed.
A rollover or conversion from a traditional IRA to a Roth IRA is usually advantageous for taxpayers who can pay the resulting tax from other funds. Assume A, who is taxed at 30 percent at all relevant times, converts a traditional IRA containing $100,000 into a Roth IRA and pays the resulting $30,000 tax from other funds. Before the conversion, each dollar of income accumulated in the IRA faced a 30 percent tax on distribution, but the conversion eliminates this prospect. A accomplishes this by effectively investing an additional $30,000, after taxes, in the IRA, but this $30,000 will itself produce earnings within the IRA on which A will never be taxed. The conversion thus has the effect of a $30,000 nondeductible contribution to the Roth IRA, free of the usual annual ceiling on IRA contributions. The conversion is also advantageous if the taxpayer is taxed at a lesser rate for the year of the conversion than is expected in the year or years of ultimate distribution (e.g., because of losses or other large deductions in the year of the rollover or conversion).
If an amount “properly allocable” to a traditional-to-Roth rollover is distributed during the year of the rollover or any of the succeeding four years, the early distribution penalty tax of Internal Revenue Code Section 72(t) applies as if the entire distribution (or, if less, the gross income recognized at the time of the rollover) were included in gross income. The deemed gross income is taxed under Internal Revenue Code Section 72(t) unless the distribution is made after the owner of the IRA attains age 59 1/2 , becomes disabled, or dies or some other exception from the penalty applies.
For more information about the Rollover IRA, please contact a retirement expert from the IRA Financial Group @ 800.472.0646.