Let us first understand the need for rollover of retirement plans. When you withdraw from retirement plan ,you are liable to be taxed on the amount of withdrawal .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. So how do you prevent taxation of lumpsum payment from retirement plans as your actual retirement is away for some years.You transfer the amount to another retirement plan. In other words , when rollover the lumpsum to another IRA account , your tax-deferred status of your retirement assets remains sameA Rollover IRA or Individual Retirement Arrangements is a retirement planning account that can be used to get your assets from a qualified employer-sponsored retirement plan (such as a 401(k) plan) by “rolling over” the funds into an IRA. . This helps in to avoid current taxes and early withdrawal penalties on payouts you receive from your employer’s retirement plan when you change jobs or retire. You can roll over all or part of any distribution from your IRA except:
- A required minimum distribution or
- A distribution of excess contributions and related earnings.
3 Ways to Rollover IRA
- 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. No taxes will be withheld from your transfer amount.
- 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. No taxes will be withheld from your transfer amount.
- 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.
Limitation in Rollover of IRA
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 . in following cases this one rollover rule does not apply
- rollovers from traditional IRAs to Roth IRAs
- trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- plan-to-IRA rollovers
- plan-to-plan rollovers