Rollover of Retirement Plans : A Quick Guide !

rolloverWhy rollover of retirement plans? Because Retirement plans have taxation issues at the time of withdrawal . So, when you quit or leave a job, you may have up the options to withdraw funds, but then you will have to pay the tax on the withdrawal . There are two options for you under which you may not be paying tax – either rollover to new employer or rollover to IRA .

. So , if you withdraw from a retirement plan, you might have to pay the tax .   By rolling over, you’re preventing taxation of your savings and therefore the kitty grows further. If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) . Further, you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions.

How do I complete a rollover?

It is tax beneficial step to deposit the payment received from one retirement plan in another retirement plan or IRA within 60 days.This can also be done through your financial institution or yu can even transfer the payment to another plan or IRA directly. Here are three ways to do the roll-over of retirement fund

  1. Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
  2. 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 retirement plans . No taxes will be withheld from your transfer amount.
  3. 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution.

Is there a time limitation for roll over and can it be extended ?

Answer to both questions is Yes . The time limit is fixed at  60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. If you can apply to IRS and explain the facts and circumstances that prevented you from rolling over within 60 days , they may waive the 60 days limit.

How many rollover can I make in year ?

You can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own .However ,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

Which types of distributions can I roll over?

IRAs: You can roll over all or part of any distribution from your IRA except:

  1. A required minimum distribution or
  2. A distribution of excess contributions and related earnings.

Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

  1. Required minimum distributions,
  2. Loans treated as a distribution,
  3. Hardship distributions,
  4. Distributions of excess contributions and related earnings,
  5. A distribution that is one of a series of substantially equal payments,
  6. Withdrawals electing out of automatic contribution arrangements,
  7. Distributions to pay for accident, health or life insurance,
  8. Dividends on employer securities, or
  9. S corporation allocations treated as deemed distributions.

Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you have to meet the plan’s conditions for a distribution, such as termination of employment.

Will taxes be withheld from my distribution?

Yes, however rate of withholding tax varies . Further, there are situation in which withholding may not be done . For example , in case of trustee to trustee transfer of IRA distribution, no withholding of tax is required. Similaraly , in case of rolling over of retirement plans  directly to another retirement plan or to an IRA , withholding does not apply.

  • IRAs: 10%
  • Retirement plans:  20%

How much can I roll over if taxes were withheld from my distribution?

If you roll over the net amount ( i.e total distribution minus the tax withheld), the tax withheld was not rolled over , so that has to be included in your income. If you roll over full amount, then the amount of withholding tax have to be paid from other source. In that case , there is no need to include the withholding tax as income , because whole amount was rolled over.

What happens if I don’t make any election regarding my retirement plan distribution?

If you’re no longer employed by the employer maintaining your retirement plan and your plan account is between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you don’t elect to receive the money or roll it over. If your plan account is $1,000 or less, the plan administrator may pay it to you, less, in most cases, 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.

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