Can You Partially Rollover an IRA?
Many novice investors wonder whether it’s possible to partially rollover their IRA. According to the IRS, partial rollovers are tax-free as long as funds are shifted between accounts with similar tax treatment (pretax to pretax or post-tax).
However, this type of rollover should be handled carefully; otherwise it could trigger taxes and penalties.
Non-Taxable Direct Rollovers
As opposed to an indirect rollover, with a Direct Rollover the original balance of your account is moved directly from one retirement account to the other without holding back for taxes or missing any 60-day deadline. According to IRS rules, only one Direct Rollover per 12-month period can be completed.
Direct Rollover involves sending all of your distribution, either electronically or by check, directly from your old plan administrator to the trustee of your new IRA account. They then deposit it directly into your account – there is no requirement that additional funds must be added but doing so could help avoid income tax and early withdrawal penalties.
Conversely, an indirect rollover involves your plan administrator sending you a check for your distribution minus an amount they withheld to cover potential taxes and early withdrawal penalties. Once this payment has been sent to you, you have 60 days to transfer all or part of it into an eligible retirement account or incur income taxes and early withdrawal penalties on it.
The IRS mandates that your former employer withhold 20% of your distribution for federal taxes when processing it, unless you opt out. Your plan sponsor must also issue you a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs and Insurance Contracts with Box 7 marked G (rollover).
If you do an indirect rollover and fail to replace the withheld amount within 60 days, any earnings are considered taxable and early withdrawal penalties may apply. Under exceptional circumstances, however, you can file for a private letter ruling with the IRS to request a waiver of this rule by paying a nonrefundable user fee and providing details regarding your situation.
Non-Taxable Indirect Rollovers
Indirect rollovers enable you to transfer funds between tax-advantaged retirement accounts without meeting the 60-day requirement, though there can be complications and unexpected taxes or penalties if this process is mishandled.
When receiving a distribution from an eligible retirement account (such as a 401(k), 403(b), or similar employer plan) or an IRA, the payer must withhold 20% for federal income tax withholding, unless you choose otherwise. If you are under age 59 1/2 when receiving the distribution, an additional tax of 10% on any taxable portion of that distribution (unless an exception applies) applies as well.
However, when moving a distribution via direct rollover or trustee-to-trustee transfer between IRAs, the IRS only considers your total balance on the date the funds were transferred – meaning no taxes will be withheld from any portion of the distribution that had to be withheld from.
There are a couple of key things to keep in mind when making indirect rollovers: (1) only one indirect rollover per year can occur and this applies both to money moving between your IRA and employer plans or another IRA and (2) distributions must be deposited within 120 days into either another IRA or employer plan, otherwise you will incur taxes and possibly a 10% penalty (if under age 59 1/2).
Finally, an indirect transfer cannot move amounts ineligible for rollover such as RMDs and hardship distributions – so for maximum convenience in moving retirement dollars around it’s best to opt for direct transfers.
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