Tax Guide |
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The definition of an individual retirement account (IRA) rollover differs slightly from the way it is defined elsewhere, as, for example, with 401(k) rollovers. A transfer of funds directly between trustees is not considered an IRA rollover, but rather a trustee-to-trustee transfer. A trustee-to-trustee transfer is always tax-free and can be done an unlimited number of times.
A rollover is a distribution to you of cash or other assets from one retirement plan in order to deposit them into another retirement plan. A rollover may occur between IRAs, or between an IRA and an employer's plan. A rollover is tax-free provided the entire rollover contribution is made by the 60th day after you receive a distribution. Any amount not rolled over in time is treated as an early withdrawal and taxable in the year distributed (not after the 60-day period expires).
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When rollovers are made between traditional IRAs, there is a one-year waiting period before another rollover of a distribution can be made. The one-year period begins on the date you receive the IRA distribution, not on the date you roll it over. Also, the one-year period applies to each IRA you own.
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Rollover to Roth IRA.
Anyone can convert amounts in a traditional IRA to a Roth IRA. The conversion is treated as a taxable distribution, but is not subject to the 10-percent early withdrawal penalty.
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Reporting requirements. Any rollovers you make involving a traditional IRA must be reported on your tax return for the year the distribution is made--even if they are tax-free. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b. You report the total amount of the distribution on Form 1040, line 15a. If the total amount was rolled over, then you enter zero on Form 1040, line 15b. However, if the total distribution was not rolled over, you enter the taxable portion of the part that was not rolled over on Form 1040, line 15b.
Inherited IRAs. If you inherit a traditional IRA from a spouse, you can roll it over to your own IRA or rename it as your own IRA. If a traditional IRA is inherited from somebody other than your spouse, you cannot roll it over or allow it to receive rollover contributions from you. Instead, you are required to withdraw and pay tax on the inherited IRA assets.
The eligible retirement plan of a deceased person can be rolled over tax-free into an IRA established to receive the distribution on behalf of a nonspouse beneficiary via trustee-to-trustee transfer. If such a transfer is made:
Transfers related to divorce. Just like any other item of property being fought over, a traditional IRA may be transferred between divorcing spouses. The transfer is totally tax-free if it is transferred under a divorce or separate maintenance decree or a written document related to such a decree.
The two commonly used methods to make the transfer are changing the name on the IRA or making a direct transfer of IRA assets to the receiving spouse's IRA. The date of transfer determines when the transferred IRA or IRA assets belong to the receiving spouse.
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