A Primer for Traditional IRA to IRA Rollover

Moving funds from one Traditional IRA to another can be accomplished by means of an IRA rollover. In order for the transaction to qualify as a rollover, the money being moved must be withdrawn from the old account and deposited in another account within 60 days. Failing to follow the rules can be costly, as you may lose your tax-deferred status on the rollover funds.

Why Consider a Rollover IRA?

If your IRA account isn’t working out the way you hoped, you may consider moving your retirement savings to another account. Maybe the custodian you currently use charges higher fees than you’d like or maybe they provide limited investments choices. Either way, you may decide another investment manager is a better option for your situation and need to move your savings.

In addition funds may also be rolled over from an employer-sponsored retirement plan, such as a 401(k). While some employers allow you to keep your retirement savings in the company plan after you switch jobs, you may lose flexibility in terms of how that money is invested. Rolling the money over lets you keep your savings tax-deferred while potentially giving you more control over your retirement assets.

How Do I Complete an IRA Rollover?

When you decide to move your IRA savings, there are two types rollovers you can do. If you choose to conduct a direct rollover, the custodian of the previous plan makes payment directly to your new custodian, usually by sending you a check made payable to the new custodian, which you will send to your new custodian. No taxes will be withheld from the transfer amount.

A second method is the 60-day rollover. In this case, your current custodian will make payment directly to you, usually in the form of a check made payable to you, and rely on you to deposit funds to the new custodian. In this case, your funds may be subject to 10% withholding unless you choose a different withholding percentage or opt-out of withholding. You will have 60 days to deposit the funds with a new custodian or the proceeds become taxable at your usual income tax rate. The IRS might also charge a 10% early withdrawal penalty if you are under age 59 1/2.

Do Not Roll Over if You Can Transfer

As an alternative to the 60-day rollover, you can ask the custodian holding your IRA to send the plan funds electronically to the custodian of the receiving account. Under this method, the money never passes through your hands, so you don’t have to worry about missing the 60-day deadline or tax withholding. The one year waiting rule doesn’t apply, either. If you are simply moving your IRA and do not need to use the funds, the transfer method is a good way of keeping things simple. Not all custodians do it, however, so speak to your financial institution to understand what they can do for you.

What Else Do I Need to Know?

If you are aged 70 1/2 or older, you are not permitted to roll over your annually required minimum distribution (RMD). The IRS would treat this as an excess contribution. Avoid tax problems by removing the current year’s RMD from your IRA before executing the rollover. The other thing to note is that you can do only one tax-free rollover from one IRA to another IRA account in one year. This is known as the one year waiting rule, but it does not apply to the transfer method. In addition, different rules may apply if you have a non-Traditional IRA, such as a SIMPLE IRA or SEP IRA. Be sure you understand the specific rollover rules for your situation.