Tax Implications of IRA Transfers and Rollovers
Consolidating your retirement accounts into one can help reduce investment fees and maximize returns, but before making any decisions it is essential that you fully comprehend any tax repercussions related to transfers or rollovers.
The IRS has implemented what’s known as the once-per-year rollover rule, which states that you may only make one indirect rollover from one IRA into another within any calendar year.
There is no limit to the number of IRA to IRA transfers you can make.
An IRA transfer involves moving money from one retirement account to another by either conducting a direct rollover or an indirect rollover; direct rollover is often faster and safer.
Direct rollovers allow you to transfer funds directly from a 401(k) or other employer-sponsored plan into an IRA account, often more efficiently than indirect rollovers, which involve your employer sending you a check in the amount of your distribution; you then have 60 days from receipt of this check to deposit it back into a retirement account or face penalties from the IRS.
Indirect rollovers are only permitted once every 12-month period. This limitation doesn’t apply to transfers from Roth IRA accounts to traditional IRAs or vice versa, but does cover any type of rollover. SEP and SIMPLE IRAs don’t count against this restriction either; you are still limited to making one indirect rollover each year from all your IRAs (including SEP and SIMPLE), including previous rollovers completed; it is known as the one-IRA-rollover-per-year rule.
There is a limit to the number of IRA to IRA transfers you can make within a year.
An IRA transfer occurs when money is moved between retirement accounts. You can do it freely and as often as desired; it doesn’t need to be reported to the IRS; while rollovers must be reported. Furthermore, there may be different tax implications depending on whether it is being transferred between traditional IRAs and Roth IRAs and there is also a limit on how many rollovers you can complete in any one year.
The once-per-year rule places restrictions on rollovers from one IRA to another IRA, meaning you are only eligible to switch accounts once every 365 days (exceptions apply if participating in SIMPLE or SEP IRA plans).
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There is a limit to the number of IRA to IRA transfers you can make in a calendar year.
When transferring retirement savings from one employer’s 401(k), 403(b), or government 457(b) plan to an Individual Retirement Account (IRA), or between different types of IRAs such as traditional to Roth, you are performing a rollover. A direct rollover occurs when your IRA custodian gives you a check written directly in your name that must be deposited directly into your new IRA within 60 days; this amount must then be reported as distribution on your tax return; furthermore, some funds may withhold funds as security to ensure you make deposits within this deadline.
However, when conducting a trustee-to-trustee transfer instead of direct rollovers, any money you transfer between trusts is never considered a distribution and you won’t incur taxes or penalties on it (Bobrow, T.C Memo. 2014-21). Unfortunately though, you are limited to only making one indirect rollover every 12 months (Bobrow T.C Memo 2014-21).
If you move funds between an IRA and workplace retirement plans or other accounts outside an IRA, they remain subject to the one-rollover-per-12-months rule and any distribution will be taxed as income, plus an early withdrawal penalty of 10 percent if under age 59 1/2. If this rule is broken, any distribution received will also be subject to income tax liability as well as early withdrawal penalties of 10% per withdrawal incurred prior to age 59 1/2.
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