Can You Convert a Rollover IRA?

401(k), you may be able to transfer those funds over into an individual retirement account (IRA). IRAs provide access to thousands of investment options while offering creditor protection.

But there is a cost associated with transferring money: taxes will be due on any money transferred out. But this might make sense if you anticipate being in a higher tax bracket in future.

Direct rollover

Direct rollover is a straightforward method for moving funds from an employee-provided retirement account such as 401(k), 403(b), or 457(b) into an IRA account with minimal hassle and tax implications. Your former plan administrator will issue you a check payable to the custodian of the new IRA and when this check has cleared your hands it can be deposited into it and completed; usually this transfer is reported to the IRS but should not incur taxes as long as any pretax money remains within it.

Indirect rollovers can be more complex and have unique tax consequences. When moving funds from an employee-sponsored retirement account into an IRA, the IRS generally treats this move as a distribution and withholds 20% for tax withholding and may impose an early withdrawal penalty if you’re under 59 1/2. Luckily, by following certain steps properly you may be able to avoid these taxes altogether.

Step one in moving your funds is getting the custodian for your IRA to agree to accept them, commonly known as “granting authority.” You can typically do this online or over the phone; once this has happened, a document with all your account information should arrive from them which must then be presented as evidence that funds have been transferred.

Your transfer should then take 60 days, as per IRS regulations which consider any funds withdrawn from an IRA as taxable unless they’re placed back into another IRA within this timeframe.

If you fail to meet this deadline, any distribution will be treated as income and subject to an early withdrawal penalty if you are under 59 1/2. Exceptionally, however, the IRS may waive this rule if proof can be shown that the money was deposited into your new IRA within 60 days.

Once the transfer has taken place, it is critical to follow all state tax requirements meticulously. Each state has different reporting and taxation guidelines; so for assistance contact one of your local H&R Block tax pros or use one of H&R Block Online solutions.

Before initiating any transfers or rollovers, be sure to carefully evaluate each funding method’s investment options, fees and expenses, available services, required minimum distributions, protection from creditors and legal judgments as well as other relevant factors before selecting one that meets your needs. All investments involve risk including possible principal loss; diversifying can help protect against losses; however no strategy can guarantee profits; for more information regarding self-directed IRA investments please see H&R Block Guide to Self-Directed IRAs


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