Can You Roll an IRA Into Another IRA Without Penalty?
By taking advantage of a direct or indirect trust-to-trustee transfer, it’s possible to roll one IRA into another without incurring penalties. There are certain important rules you should keep in mind; therefore, for best results seek professional advice before undertaking this transaction.
The IRS allows only one rollover between IRAs annually. Distributions not rolled over within 60 days may become taxable and subject to an early withdrawal penalty if you’re under age 59 1/2.
Direct rollovers
Direct rollover is the process of moving funds directly from one retirement account to the other, typically using this method for moving 401(k) and pension savings into an IRA, although you could use this strategy between different types of retirement accounts as well. The aim is to maintain tax-deferred status without incurring penalties; generally speaking, direct rollover must be completed within 60 days after any distribution but exceptions do apply.
Rollover is the process of moving money from an employer-sponsored plan, such as a 401(k), pension or profit-sharing account into an individual retirement account (IRA). You will typically require an IRA custodian for this transaction; funds from your old account should arrive in a check addressed directly to trustee of new account; then original custodian will send written confirmation that funds were indeed transferred over; new account can either reside with same institution or different institution.
Indirect rollovers are more complicated than direct ones and must be completed within 60 days from the distribution date. You must request your distribution from your current account and deposit it directly into another eligible retirement account; initial distributions typically incur a mandatory 20% withholding tax which must be compensated for from other sources before finalising this indirect rollover process. You are limited to only performing one indirect rollover every 12-month period.
What are the Advantages of Direct Rollover? There are several advantages associated with direct rollover. First of all, the process tends to be quicker and less risky than an indirect rollover; it’s especially useful if you have had multiple jobs over your career and wish to consolidate all of your 401(k), 403(b), and 457(b) plans into an IRA for easier management. Unfortunately though, direct rollover will prevent reclaiming of withholding taxes which would otherwise have been possible with indirect rollover.
What are the disadvantages of direct rollover? Unfortunately, there’s no easy answer to this question as it depends on your unique situation and goals for this retirement account rollover. Common drawbacks of direct rollover include time limitations (60-day limit) and possible early withdrawal penalties if under 59 1/2.
The IRS imposes a 60-day time limit on both direct and indirect rollovers, meaning if you fail to transfer all funds by the end of this time frame into an eligible account within 60 days, income tax and an early withdrawal penalty may apply. There may be exceptions; however they’re generally not applicable. If your financial situation is complex however, speaking with a financial professional about what options available would best meet your needs may be the way forward.
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