IRA Rollover Rules

According to data from the Bureau of Labor Statistics, the average person will have around 11 jobs over the course of his or her life. All those jobs can lead to a lot of variety in a life and a lot of different retirement accounts. When you leave a job, you get to hold onto your employer-sponsored retirement plan, but you are no longer able to make contributions to it. IRA rollover rules allow you to transfer the money from a 401(k) or other employer sponsored account to an IRA.

You’re able to continue to enjoy a number of tax benefits when you complete an IRA rollover, such as tax deferred earnings, or, in the case of a Roth IRA, tax-free withdrawals once you reach retirement age. Understanding a few common IRA rollover rules will help you complete the transfer without any issues and without triggering a hefty tax penalty.

What Can You Rollover?

You can usually roll over the money in an employer-sponsored retirement plan, such as a 401(k), to either a traditional or Roth IRA. You can also roll over the amount in an IRA with one company to an IRA at another company and can roll over a traditional IRA into a Roth IRA.

Rollover Frequency

You aren’t able to roll over IRAs as much as you want. The IRS allows you one rollover per 12-month period, no matter how many IRAs you own. That means if you have three IRAs, and you roll over $3,000 from the first IRA into the third IRA in July of one year, you won’t be able to roll over any money from the second IRA into the third in January of the next year. You’ll need to wait until July of the next year before you roll over any more money from one IRA to another.

There are a few exceptions to the one rollover per year policy. Per the IRS, you can make more than one rollover from an employer sponsored plan to an IRA during a 12-month period. You also are allowed to convert an unlimited number of traditional IRAs to Roth IRAs and can make unlimited trustee-to-trustee transfers from one IRA to another. The one rollover for every 12 months rule only applies if your IRA gives you a check and you move the money into a new IRA yourself.

How to Complete the Rollover

The rollover process usually involves several steps. The first step is to figure out what you’re rolling over. Take a look at the latest statement from your employer’s plan to see how much is in the account and what it’s been invested in. The next step is to decide what to do with the money, whether you want to roll it into a traditional IRA or a Roth. The third step is to open your new IRA account (if you don’t have one already). Finally, you’ll want to start the process of rolling over the money from one account to the next.

You’ll usually need to complete a few forms if you’re going to transfer funds from an employer sponsored account to an IRA. The forms can be complicated, so it is helpful to work with a wealth advisor to make sure that you check the correct boxes on the paperwork and avoid any potential tax penalties after the rollover is completed. For example, the check from your 401(k) or other plan should be made out to the administrator of the IRA, not to you. If the check is written out to you, the employer sponsored plan needs to withhold 20 percent of the amount for taxes. Also, if the check is made out to you, the rollover needs to be completed within 60 days or you’ll need to pay income tax on the amount, and in some cases, a penalty tax.

Keep in mind that if you roll money from a tax-deferred employer sponsored plan to a Roth IRA, you will have to pay income tax on the amount you rollover. That can mean a heftier tax bill for the year. Your advisor can help you determine if converting a 401(k) to a Roth is worth it or if you’re better off going the traditional IRA route.
It can be easy to make mistakes when it comes to retirement planning and account rollovers. If you want to learn more about your account options once you leave a job or to learn more about the rollover process, contact Nicholas Wealth Management today.