When moving your retirement money, go direct!

April 16, 2015 by Frank Thomas
Block with Tax words on it

You have your traditional IRA account invested at your bank but you are not happy with the rate of return. You’ve heard that it’s possible to move your traditional IRA to another financial institution and not have to pay any taxes. But is it true? The answer is yes, as long as you follow specific procedures when you do. Here’s what you need to know:

There are two ways to roll over a retirement account. One is referred to as a direct rollover and the other is an indirect rollover.

The best way to do an IRA rollover is by a direct rollover, also known as a direct transfer or a trustee-to-trustee transfer. A direct rollover is when you make an arrangement in advance between both financial institutions to transfer the funds between accounts without you taking possession of the money. Most direct rollovers are usually nontaxable, such as a regular 401(k) deposited (rolled over) to a traditional IRA. However, certain rollovers may be taxable depending on the type of retirement accounts involved. For example, a regular 401(k) rolled over (converted) to a Roth IRA is usually taxable. There is no limit to the number of direct rollovers you are allowed to make, and no special rules or deadlines you need to remember.

Now let’s talk about the indirect rollover. An indirect rollover is when you take possession of the funds before you re-deposit them. There are two key rules you need to know to avoid problems, and perhaps taxes. With an indirect rollover you are allowed 60 days from the date of withdrawal (distribution) to deposit the money into another qualified retirement account. If you miss the deadline, by even one day, it will generally not qualify as a nontaxable rollover. This is known as the 60-day rule.

In addition to the 60-day rule, there is also a one-year rule. The rule is that you can only do one indirect rollover in a one-year period. The one-year period is not based on a calendar year, but begins on the date of the withdrawal (distribution). The one-year rule only applies to IRA-to-IRA indirect rollovers, as there is generally no limit to the number of indirect rollovers if the retirement funds are deposited to or withdrawn from an employer retirement account, such as a 401(k).

For example, let’s say you take a withdrawal (distribution) from your traditional IRA account on January 3, 2015, and then deposit the money into another traditional IRA account on February 10, 2015. This is considered a nontaxable indirect rollover as long as you have not done another IRA-to-IRA indirect rollover in the previous year. Due to the one-year rule the soonest you could do another IRA-to-IRA indirect rollover would be January 4, 2016.

Another thing to keep in mind in regards to indirect rollovers is that an inherited retirement account (unless inherited from a surviving spouse) is not eligible for an indirect rollover, as it requires special handling.

Before you consider doing an IRA-to-IRA indirect rollover you need to make sure you have not done another IRA-to-IRA indirect rollover during the previous year, and then remember to complete the indirect rollover within 60 days. Or better yet, whenever possible, do a direct rollover on any IRA-to-IRA rollovers!

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Frank Thomas, EA
Tax Content Developer

 

Frank began his career at TaxAudit in 2005 as a Return Reviewer. Analyzing thousands of self-prepared tax returns every year for the next five tax seasons exposed him to many complicated areas of the tax code, and he became an expert at spotting the multitude of mistakes that can be made when preparing tax returns. His current position with the company is Tax Content Developer. In this role, he helps to ensure the soundness of the tax positions taken by our reps in their responses to the IRS and develops tax courses for our continuing education program. He is a member of the Research Team and has been instructing tax classes since 2009. With a career in the tax field spanning more than 20 years, Frank has owned and operated his own business, Thomas Tax Service, since 1991. Prior to working in taxes, Frank had a career in the banking industry. 


 

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