Congress carefully considered how much money you can contribute each year to your individual retirement account. A rollover bypasses the contribution limits, so the rules surrounding them are strict. If you belong to an employer plan, find out whether it is qualified, since only these can be rolled into an IRA.
A qualified plan meets the standards of the Employee Retirement Income Security Act and provides tax benefits to plan members. You can roll any of the following plan types to an IRA: a traditional IRA, an employer's qualified retirement plan such as a 401(k), a qualified trust, a deferred-compensation plan such as a 457, or a tax-sheltered annuity plan such as a 403(b). You can't roll over nonqualified plans such as 409A deferred-compensation plans, executive bonus plans, group carve-out plans or split-dollar life insurance plans.
You can request a trustee-to-trustee transfer from a qualified retirement plan to an IRA. You must request a direct transfer in writing from your old and new plan custodians, specifying the account numbers and the cash or property to transfer. You can also perform a rollover, in which you distribute cash and property from your old account and contribute it to your IRA. You must complete the rollover in 60 days, or the Internal Revenue Service will treat it as a taxable distribution. Your old plan's custodian will withhold 20 percent of the distribution for taxes. If you don't replenish the 20 percent in your contribution, the IRS will tax it. You reclaim this amount on your next tax return.
You can't roll certain distributions from a qualified plan to an IRA, such as a required minimum distribution or a hardship distribution. You can't roll over any portion of a series of substantially equal periodic distributions, excess contributions, loans, dividends on employer securities or life insurance policies. If you paid taxes on any portion of the funds you roll over, you assign this amount to the cost basis of the IRA. You don’t pay taxes on your cost basis when you withdraw it from an IRA.
You can include distributions from a nonqualified plan in your yearly contributions to your IRA, but it's not a rollover. In 2013, you can contribute up to your full annual income or $5,500, whichever is less. If you are 50 or older, the limit is $6,500. If you or your spouse has access to a qualified plan at work, you may not be able to deduct the full contribution to a traditional IRA. It depends on whether your income exceeds certain limits that change yearly. You don't deduct contributions to a Roth IRA. However, the amount you can contribute may be limited or eliminated if your income exceeds the limits in place for the year.
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