You might need to make eligible rollover distributions to consolidate your retirement accounts. For example, if you change jobs, you may want to move assets from your old employer’s 401(k) into your new employer’s 401(k), rather than having two accounts. If your new employer doesn’t allow rollovers, you might decide to make an eligible rollover distribution from your previous employer’s plan into your own IRA. Another reason you might need to make eligible rollover distributions is to change providers. For example, you may have an IRA account through a brokerage firm, but you’re unhappy with the investment options within that account. You could make an eligible rollover distribution to a new IRA provider who offers the investment choices you’re looking for.
How Do Eligible Rollover Distributions Work?
Eligible rollover distributions work by transferring the assets from one retirement account into another. The Internal Revenue Code allows you to do this within 60 days of the distribution. There can be some exceptions to this 60-day rule. But typically, if you receive a distribution from a retirement account and don’t complete the rollover in this time frame, you may incur additional costs. You could owe income tax on the distribution as well as an early withdrawal penalty, which generally applies to anyone younger than age 59 ½. Certain restrictions may apply as to which retirement accounts you can transfer money between in order for it to be an eligible rollover distribution. However, in general, you can roll money tax-free from most traditional retirement accounts into other traditional retirement accounts (once per year for an IRA rollover). You can also move assets from one Roth account to another Roth account. Not every type of distribution, even when following account structure rules, can be rolled over without needing to pay extra taxes. For example, a required minimum distribution (RMD) or a plan loan is not eligible for a tax-free rollover. An employer plan may also have its own rules about rollovers. But for the most part, you can roll over all or part of your retirement assets into another account without paying more in taxes. To make an eligible rollover distribution from one qualified plan or account to another, you can transfer the money in one of three ways:
Direct rollovers: You have your retirement plan administrator send the money from your account directly to the new account provider, rather than sending the money to you first.Trustee-to-trustee transfers: For IRA accounts, your previous IRA account provider directly transfers your retirement money to a new IRA provider. Indirect or 60-day rollovers: If the distribution is first made to you as an individual, such as via a check from your previous retirement system, you then need to make the rollover yourself into the new account within 60 days to avoid paying taxes on it.
It’s important to note that for indirect distributions, the previous financial institution must withhold money for taxes (10% for IRAs, 20% for retirement plans). To make the full rollover distribution, you’ll need to deposit enough of your own money into the new account to equal the tax withholding, along with the main payment from your previous retirement account; otherwise, the withholding can be taxed as an ineligible distribution. For example, if you had $10,000 in a 401(k) account, the plan administrator might send you a check for $8,000, with $2,000 withheld for taxes. If you want to make an eligible rollover distribution, you would then need to deposit $10,000 into the new retirement account rather than just the $8,000 payment from the check. Come tax season, you then might be eligible for a refund for the $2,000, depending on your overall tax circumstances.
What Eligible Rollover Distributions Mean for Individuals
Understanding eligible rollover distributions can help you manage your retirement planning and your taxes. Some employer plans don’t allow previous employees to keep money in their retirement accounts after they leave. In that case, you would need to make an eligible rollover distribution to avoid paying extra taxes when you change jobs. Eligible rollover distributions can also help you manage your retirement planning even if you’re not changing jobs. They can help you consolidate your retirement accounts and manage your retirement money with the provider of your choice. You can move your money around without having the distribution count toward your gross income. If you’re confused about how to manage your distributions, you can receive help along the way. You can contact either your previous retirement plan administrator or the new account provider. They may be able to help facilitate a direct rollover to keep everything simple for you. If you’re getting an eligible rollover distribution of more than $200, you don’t have to guess how the process works. The administrator of your plan must give you a notice about your rights to transfer or roll over your distribution. They are also required to facilitate a direct transfer to another IRA or retirement plan. So, while it’s helpful to understand these rules, you won’t necessarily be on your own when the time comes to make the rollover. You are entitled to help from your retirement plan administrators.
