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IRA rollover rules: Everything to know

June 13, 2022 • 6 min read

What we'll cover

  • The definition of an IRA rollover

  • The difference between IRA transfers, rollovers and coversions

  •  The 60-day rollover rule

If moving your retirement funds around makes you a little nervous, that's normal. With many retirement plans, including IRAs and 401(k)s, you could end up paying unexpected penalties and additional tax if you're not careful. Understanding a few basic rules and consulting with a tax professional can go a long way in avoiding costly mistakes.

In IRA lingo, moving money from one retirement account to another is known as a rollover, a transfer or a conversion. As you may have guessed, those transactions have rules. Here are a few things to understand about rolling over your retirement funds, IRA rollover rules and how to plan for retirement.

What is an IRA rollover?

A rollover IRA lets you move funds from your prior employer-sponsored retirement plan into an IRA if you leave your job, for instance, rolling over your 401(k) to an IRA. This way, you can maintain your retirement asset tax-deferred status without paying taxes or paying for an early withdrawal when you transfer the money in your account.

Know the difference between IRA transfers, rollover, and conversions

The difference between an IRA transfer and a rollover is that a transfer occurs between retirement accounts of the same type, while a rollover occurs between two different types of retirement accounts.

For example, a transfer is when you move funds from an IRA at one bank to an IRA at another.  Moving money from your 401(k) plan to an IRA, is considered a rollover. A Roth conversion occurs when you move money from a traditional IRA into a Roth IRA. It’s important to know the difference between transfers, rollovers and conversions, because the IRS treats these transactions differently for tax purposes.

60-day rollover rules

The last thing you want to do is accidentally pay more taxes than you have to when funding an IRA. So, take note: money from a retirement plan paid directly to you may be subject to mandatory tax withholdings even if you intend to roll it over to another retirement plan later. (This is called an indirect rollover.)

Save yourself that step (and that money) by making sure the funds you roll over go directly to another retirement plan or IRA in one of two ways:

  • A direct rollover: If you’re getting a distribution (payment) from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. The administrator may issue your distribution in the form of a check made payable to your new account. 

  • Trustee-to-trustee transfer: If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan.

With an IRA rollover, the original custodian sends you a check for the total amount you’re withdrawing from your IRA. You have 60 days to roll it over to your new financial institution from the day you receive the funds from your previous financial institution. With both rollovers and transfers, the money must be in the new account no later than 60 days from when it was withdrawn from the original retirement account. You can technically “borrow” these funds during that time period, but that can be a little risky because if you don’t deposit the full amount into the new account, you’ll pay an early withdrawal penalty and income tax on that amount.

What happens if you don't get the money rolled over within the 60-day window? You'll pay income tax on your funds and potentially pay penalties.

IRA one-rollover-per-year rule

As an IRA owner, you can only make one 60-day indirect rollover happen per one-year period.

Let's look at this rule more carefully. You can roll assets from one IRA to another IRA in any one-year period, but only to indirect rollovers — it does not count for direct transfers.

Put simply, the one-per year limit does not apply to:

  • Rollovers from traditional IRAs to Roth IRAs (conversions)

  • Trustee-to-trustee transfers to another IRA

  • IRA-to-plan rollovers

  • Plan-to-IRA rollovers

  • Plan-to-plan rollovers

Rollover IRA tax rules

When you roll over a retirement plan distribution, you generally don't pay tax on it until you withdraw money from your new plan, though it's best to familiarize yourself with all IRA rollover tax rules to be certain.

If you don't roll over your payment, it will be taxable as ordinary income, except for any portion that was after-tax or nondeductible contributions. There also might be a 10% early distribution penalty added if you’re under the age of 59½ or a penalty for making an excess contribution to an IRA, taxed at 6% per year as long as your money stays in your IRA.

How funds roll from one retirement plan directly into another

It's easy to make sure you roll money from one retirement plan into another. Again, opt for a direct rollover instead of an indirect rollover. Contact your former employer’s plan administrator, ask for a direct rollover and complete the required forms. Finally, ask for your account balance to be sent to your new account provider.

Is there a limit to how much you can roll over into an IRA?

There is no limit on the amount you can roll over into an IRA. A rollover will also not affect your annual IRA contribution limit.

Common IRA rollover mistakes to avoid

Let's take a quick look at a few common rollover mistakes to avoid:

  • Missing the 60-day window: Opting for an indirect rollover can become a costly mistake. Not completing a 60-day rollover on time can have consequences such as your money being taxed as income and subject to a 10% early withdrawal penalty. Another reason an indirect rollover can be pricey is your workplace plan administrator can withhold 20% of your account and send it to the IRS as a federal income tax prepayment on the distribution. 

  • Rolling over before taking a required minimum distribution (RMD): This mistake affects those 73 or older who are required to take an RMD for the year that they will receive the distribution. Doing so would result in an excess contribution, which is subject to an annual 6% penalty until it is corrected. 

  • Withdrawing instead of rolling it over: If you choose to withdraw instead of choosing a rollover, you may lose money. Not only will you miss out on compounding interest, but you’ll also get hit with a tax penalty.

Rollover IRA with Ally Invest

It’s easy to roll over an IRA with Ally Invest. Use Ally’s Self-Directed Trading online application, select “IRA,” then select the appropriate type — a rollover IRA or, if your 401(k) or 403(b) is a Roth account, select Roth IRA. 

Next, request a rollover through a direct or indirect as soon as you request the rollover, you can invest your funds.

Your biggest takeaway: The money for both a rollover and transfer must be in the new account no later than 60 days from when it was withdrawn from the original retirement account. You technically can “borrow” these funds during that time period, but that’s a little risky because if you don’t deposit the full amount into the new account, you’ll end up paying an early withdrawal penalty and income tax on that amount.

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