An individual retirement account is a tax-advantaged way to save for retirement. But you may find you want to move your retirement assets from your current IRA to another IRA using a rollover. Reasons for doing this may be to get a better return on your money or because you inherited an IRA from your spouse and want to add the inherited IRA to your own. Unlike with contributions, there is no maximum dollar limit on an IRA rollover.
If you have a traditional IRA, you can roll the assets over to another traditional IRA without tax or penalties. You can also roll over a traditional IRA to an employer-sponsored retirement plan such as a 401(k), federal Thrift Savings Plan for federal employees, 457(b) for state and local government employees, 403(b) tax-sheltered annuity for employees of public schools and charitable organizations, or SEP-IRA or SIMPLE-IRA for a small business. These plans have the option to refuse rollovers. You can also roll over your traditional IRA into a Roth IRA. You must pay income tax on the amount rolled over, but you won't owe a 10 percent early withdrawal penalty.
Other IRA Types
If you have a SIMPLE-IRA, you can roll over the funds into a traditional IRA or another employer-sponsored retirement plan without tax or penalty. You can also convert it into a personal Roth IRA, but must pay income tax on the rollover amount. You must wait two years after you start participation before you can roll over a SIMPLE-IRA unless you are rolling over to another SIMPLE-IRA. You can roll a SEP-IRA over to a traditional IRA or another employer-sponsored plan other than a SIMPLE-IRA, or you can convert it into a personal Roth account. If you have a Roth IRA, your only rollover option is into another Roth. You're not allowed to roll a Roth IRA into any type of tax-deferred retirement plan or any designated Roth 401(k), 457(b) or 403(b).
You can do a rollover in two ways. You can do an indirect rollover by giving your current IRA trustee a rollover request form. When you receive the rollover distribution check, you have 60 days to deposit the money into the other IRA. If you don't, the full amount of the rollover distribution from a tax-deferred IRA becomes taxable. In the case of a Roth IRA, the interest earned on your contributions becomes taxable but not your contributions. If you are under 59 1/2 years old, you also will owe the 10 percent early withdrawal tax penalty.
Your other option is a direct trustee-to-trustee transfer. With this transaction, the trustee of your current IRA turns your rollover funds over to the trustee of the recipient account. These rollovers normally are not affected by the 60-day time limit because they usually take less than a week. Because the money never leaves a retirement plan, you don't need to report trustee-to-trustee IRA transfers.
If you make a tax-free indirect rollover, you can’t do another rollover from the donor IRA account for the next 12 months. And you must also wait 12 months before you can roll over funds from the retirement account that received the money. The 12-month rule applies to tax-deferred and Roth IRAs but not to trustee-to-trustee transfers. You report indirect rollovers on lines 15a and 15b of IRS Form 1040. You report the amount of your distribution on line 15a. If the entire amount was rolled over, enter "zero" on line 15b and write "rollover" next to it. If only part was rolled over, write the amount not rolled over on line 15b and add it to your taxable income.
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