IRA Rollover Rules

The IRA rollover rules aren’t terribly complicated, but there is also no room for error.  If you drop the ball, you could be slapped with stiff penalties in addition to owing regular income tax on the amount.  Follow these IRA rollover rules to ensure everything goes smoothly.

IRA Rollover Rules

• An IRA rollover is permitted for any eligible rollover distribution from any employer-sponsored retirement plan, such as a 401k, 403b, 457 plan, etc.  Qualified pension and profit-sharing plans are also generally eligible.
• You have 60 days after receiving the funds from your old 401k to complete the rollover to the new IRA.  If you fail to complete the rollover within the 60 day window, the IRS will treat it as a distribution, meaning you will owe income tax and an additional 10% penalty if you are under age 59 1/2.
• There are 3 possible rollover methods:  direct rollover, indirect rollover, and cash distribution rollover.  The direct rollover method is by far the most popular;  cash distribution the least popular, for reasons described below.

If you choose a cash distribution rollover, your employer is required by law to withhold 20% of the amount for income taxes;  however, you have to deposit the full amount of the distribution in your new IRA within the 60 day window, meaning you will have to make up the 20% shortfall on your own.  If you fail to do so, it will be treated as a withdrawal with all the accompanying penalties.  Sure, you’ll get the 20% back with your next tax return, but there’s really no reason to every opt for a cash distribution rollover.

It’s best to set up a rollover IRA ahead of time and have your IRA company set up a direct rollover on your behalf.  This is by far the least risky way to initiate a 401k rollover due to the pitfalls outlined above.  With a direct rollover, the IRA company takes care of the actual transfer on your behalf.  Since you never receive a check of any kind, it is impossible for  you to accidentally trigger an IRA penalty.  Besides, a direct rollover is so easy and convenient, why would you bother doing anything else?  Having your IRA company take care of everything is the easiest and safest way to make sure all the IRA rollover rules are followed to the T.