IRA Transfers and Rollovers
The shifting of funds from one IRA trustee/custodian directly
to another trustee/custodian is called a transfer. It is not considered
a rollover because nothing was paid over to you. You can have as many
transfers as you like each year; transfers are tax-free, and there
are no waiting periods between transfers. They don't have to be reported
on your tax return.
A rollover, in contrast, is a tax-free
distribution to you of assets from one IRA or retirement plan that
you then contribute to a different IRA or retirement plan. Under certain
circumstances, you may either roll over assets withdrawn from one
IRA into another, or roll over a distribution from a qualified retirement
plan into an IRA. Distributions of pre-tax assets from certain qualified
plans that were rolled into an IRA can generally be rolled backed
to that qualified plan.
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Work Smart If the distribution from a qualified
plan is made directly to you, the payer must withhold 20 percent of
it for taxes. You can avoid the withholding by having the payer transfer
the funds directly to the trustee/custodian of your IRA, or having
the check made out to the trustee/custodian of your IRA or other qualified
plan. |
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To avoid tax, a distribution paid to you (including the
20% withheld) must be rolled over within 60 days of receipt of the
distribution. Any portion not timely rolled over, including the 20%
withheld will be subject to income taxes. Rollovers, whether taxable
or not, must be reported on your tax return, as follows: Enter the
total amount of the IRA distribution on Line 15a of Form 1040 or Line
11a of Form 1040A; then enter the taxable amount, if any (for example,
any amount that was not rolled over) on Line 15b or Line 11b. If you
are rolling over a distribution from an employer's plan to an IRA,
the distribution and the taxable portion (if any) are reported on
Lines 16a and 16b of Form 1040, or Line 12a and 12b of Form 1040A.
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Warning Rollovers not completed within 60 days
can have horrible tax consequences. First of all, they are treated
as taxable distributions. On top of the regular income tax on the
entire amount, you may also have to pay a 10 percent excise tax penalty
if the distribution was considered premature.
If you place the amount into another IRA account after 60 days, you
must treat it as a brand-new IRA contribution for the tax year in
which it is made, and another 15 percent excise tax penalty will apply
to any portion of the amount that exceeds $5,500 ($6,500 for those
age 50 and above) in 2014 (and 2015). These defective rollovers must
be reported on Form 5329, Additional Taxes on Qualified Plans (Including
IRAs) and Other Tax-Favored Accounts. |
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A rollover from one IRA to another IRA enables you to
change your investment strategy and may enhance your rate of return.
It can also be used to obtain a short "bridge loan" from yourself,
since you'll have the use of the funds for any purpose you want, for
up to 60 days. This type of rollover may be made only once a year,
but the once-a-year rule applies separately to each IRA you own for
2014.
Beginning in 2015, the once-a-year rule applies to the
aggregate of all your IRAs. In other words, all your IRAs will be
treated as if they were one IRA for this purpose, so you will really
only be able to do this once a year after 2014.
If property
other than cash is received, that same property must be rolled over.
Except for an IRA received by a surviving spouse, an inherited IRA
cannot be rolled over into, or receive a rollover from, another IRA.
Distributions
from an eligible retirement plan of a deceased participant/owner can
be rolled over by a nonspouse beneficiary. If a direct trustee-to-trustee
transfer is made to an IRA that has been established to receive the
distribution on behalf of a beneficiary who is not the participant/owner's
surviving spouse, the following treatment applies:
- The transfer is treated as an eligible rollover distribution;
- The transferee IRA is treated as an inherited account; and
- The required minimum distribution rules applicable where the participant/owner
dies before the entire interest is distributed apply to the transferee
IRA; the special rules for surviving spouse beneficiaries do not apply.
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