Can You Rollover an IRA Without Paying Taxes?
You typically cannot avoid incurring the 10% early withdrawal penalty tax for payments outside your IRA, however there is one exception whereby distributions made in check form can be converted and deposited into an IRA within 60 days without incurring income tax liabilities, provided certain rules are followed.
Direct rollovers
Direct rollover is an advantageous means of handling retirement account distribution, since it prevents taxes from accruing on funds being moved over to your new IRA custodian. A direct rollover must equal or surpass the amount received as distribution from previous employers.
If you receive a distribution from either your former employer’s retirement plan or an IRA, the IRS requires that either cash out the funds immediately or transfer them into another qualified retirement account within 60 days – to prevent people from simply cashing out and evading income taxation.
If you decide to initiate a direct rollover, it is crucial that the new IRA be established as a traditional rather than Roth IRA and accepts any investments contained within your old 401(k). For instance, if rolling over assets invested in mutual funds requires setting up another account with similar mutual fund investments, your new IRA should reflect this fact.
Direct rollovers may be beneficial in helping to lower taxes. Your former employer is required to withhold 20% of any distribution from your 401(k), which becomes taxable when the distribution arrives in your account. Without making special elections to reduce this withholding or using other funds to cover it, all distributions become fully taxable.
Keep a few things in mind when considering indirect rollovers: For starters, only one indirect transfer per year and only one rollover from traditional to Roth IRA distribution can occur per year.
if the distribution you are receiving constitutes a “taxable event”, like a lump-sum payment, one way you may reduce its tax impact is to include some of the after-tax contributions included with it in a new IRA as part of an “or partial rollover,” known as a 401(k) carryforward.
Tax law is complex and there are multiple factors to keep in mind when shifting money from a qualified retirement account to an individual retirement account. Therefore, seeking professional advice before making decisions regarding how best to invest your retirement savings would be wise. A financial planner can assist in understanding all possible scenarios before suggesting one that best meets your needs and wants. Our Finder makes finding one easier – our list of pre-screened professionals in your area are ready and waiting – just fill out our simple online form now to begin working together!
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