Can You Rollover an IRA Without Paying Taxes?
Direct rollover is the easiest and simplest way to transfer an IRA; your old custodian simply sends a check directly to your new provider for you.
When making an indirect rollover, income taxes will be withheld from your distribution and must be deposited back into an IRA within 60 days or face penalties.
Rollover IRAs provide one method for moving funds from employer-sponsored retirement plans like 401(k) into an individual retirement account (IRA). You may choose this option if you are switching jobs, retiring early or being laid off and would like to consolidate funds from several accounts into one IRA for easier management and tracking. By choosing direct rollover, your old employer’s retirement plan administrator will transfer the distribution directly to your new IRA custodian – thus avoiding having any taxes withheld from it. However, if your rollover distribution does not make its full deposit within 60 days of receiving it, the IRS will treat it as an ordinary withdrawal and tax you with income taxes plus an early withdrawal penalty if you are under 59.5 years old.
Direct rollovers are most frequently conducted when changing jobs and need to transfer your former employer’s retirement plan funds directly into an IRA with Vanguard or Fidelity Investments; otherwise you must send any distribution directly to your own bank for deposit into your IRA yourself if applicable and pay any applicable taxes and withholding yourself.
Direct Rollovers Are Faster and Easier
Indirect rollovers may take more time and require you to physically take possession of money during an indirect rollover; while direct ones don’t give anyone possession at all; making this much quicker and simpler than indirect rolls in which money distributed may come directly out to you and have to be spent within 60 days of receipt.
Indirect Rollovers Are More Expensive When electing for an indirect rollover, the money that was taken out of your retirement plan or IRA becomes your own personal property and must be deposited within 60 days without withholdings to a new IRA before the IRS treats the distribution as ordinary withdrawal and charges taxes and possibly an early withdrawal penalty if you are under 59.5.
Direct and indirect rollovers offer you two options, with the latter usually more costly. Direct rollovers usually involve no fees whatsoever while indirect ones often incur administrative and handling fees that quickly add up.
Direct rollovers may be completed as often as desired; however, you are only allowed one indirect rollover every 12 months due to IRS restrictions limiting excess contributions; any subsequent attempts could incur taxes and penalties from both plans involved – especially between an IRA and qualified employer-sponsored retirement plans such as 401(k). It’s advisable to seek guidance from a financial professional prior to undertaking either form of rollover.