Can You Roll an IRA Into Another IRA Without Penalty?
If you need to transfer funds between similar retirement accounts, a direct rollover may provide an easy and tax-efficient solution without waiting 60 days or paying taxes or penalties.
Your plan administrator sends a check directly from the previous plan to your new IRA institution, which must then be deposited within 60 days to avoid taxes and penalties.
Direct rollovers
Retirement accounts offer two primary methods for moving funds between custodians: Direct Rollovers and Indirect Transfers. Though they share similarities, understanding their specific differences is crucial in order to avoid potentially expensive errors.
Direct rollovers involve plan administrators sending IRA assets directly to a new custodian for purposes of rolling them over, either from one employer’s account to the next or from changing jobs, relocating, or retiring participants directly to their new IRA custodians. This process can be used for moving money between 401(k) plans and IRAs or between traditional, Roth, SIMPLE and SEP IRAs; it can even be utilized when moving between retirement accounts at different employers when moving between positions or employers when switching jobs or retiring!
Direct rollovers are generally preferred over indirect transfers because they don’t trigger the 60-day rule or 20% mandatory tax withholding associated with distributions from taxable retirement accounts. To be effective, however, recipients of checks from direct rollovers must be from an IRA provider such as a bank, mutual fund company, or brokerage house; when dealing with indirect rollovers the recipient may need to find the amount withheld for your distribution in order for this transaction not to fail and become treated as taxable distribution.
Indirect Transfers
An indirect transfer occurs when a retiree receives funds as distributions from their plan and then deposits them directly into either their current IRA, another one or an inherited Roth IRA. It’s most frequently seen when switching from workplace retirement plans to an IRA or vice versa and most often within any one-year period; any failure to abide by this rule could incur income taxes and penalties against that individual.
To execute an indirect rollover, the retiree’s 401(k) plan or IRA custodian must issue a check for the distribution amount to be made out to the trustee of their new IRA or IRA and deposited within 60 days in order to avoid being considered taxable events and incurring penalties.
Note that the IRS only permits an indirect rollover once every 12 months for all IRAs owned. Any attempt at an additional indirect rollover within the same 365-day period would violate this rule and constitute a prohibited transaction, potentially incurring a 6% excess contribution penalty until corrected. Therefore, indirect rollovers should generally be avoided and direct rollovers should be the preferred means of moving retirement assets between accounts in most instances. But because each situation may differ significantly, it’s always advisable to consult a financial advisor prior to making any definitive decisions regarding moving your retirement assets between accounts.
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