You don't have to stick with your first choice when it comes to individual retirement accounts. Though the Internal Revenue Service penalizes you for taking early withdrawals, you're allowed to use rollovers to move money from one IRA to another regardless of your age. However, the IRS does impose some restrictions on rollover use.
To perform a rollover, take a distribution from your IRA and then redeposit it in another qualifying retirement account within 60 days. For traditional IRAs, you can roll the money into another traditional IRA, a Roth IRA, a SEP IRA, a 401(k) plan, 403(b) plan or 457(b) plan. Roth IRAs can only be rolled into another Roth IRA. Any amount of tax withheld must still be rolled over within 60 days. For example, suppose you take out $30,000 but $3,000 is withheld for federal income taxes. If you only redeposit the $27,000 you received, it is treated as taking a distribution on the remaining $3,000.
You won't owe any taxes unless you make a mistake on the rollover or you're converting money from a traditional IRA to a Roth IRA. If you make a mistake, such as not completing the rollover within the 60-day time limit or not rolling over the entirety of the distribution, the IRS treats it as if you distributed all or a portion of the rollover. As a result, that portion counts as taxable income and potentially subjects it to the early withdrawal penalty. If you're converting the money to a Roth IRA, you'll owe taxes on the conversion because you're moving the money from a tax-deferred account to an after-tax account. As long as you roll over the entire amount, you won't owe any early withdrawal penalties.
After rolling an IRA over -- either on the distributing or receiving end -- you must wait 12 months before you can start another rollover from that IRA. For example, say you rolled money from your IRA at Bank A to your IRA at Bank B on Jan. 1, 2013. You couldn't roll over money from either of those accounts until Jan. 1, 2014. However, if you took a distribution from your IRA at Bank C, you could roll that money into either of those IRAs prior to Jan. 1, 2014. If you did, you would restart the 12-month waiting period for that account.
All rollovers must be reported on your income taxes, even if they don't result in additional taxable income. Report the total amount of the rollover on line 15a of Form 1040 or 11a of Form 1040A. Report the taxable portion on line 15b of Form 1040 or 11b of Form 1040A. Next, write "rollover" next to line 15b or 11b. Report any federal taxes withheld from the rollover -- noted in Box 4 of your Form 1099-R -- on line 62 of Form 1040 or line 36 of Form 1040A.
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