IRA Rollover Rules You Need To Know
#1 – The 60 Day IRA Rollover Rule
Money you personally receive from an IRA rollover that is not reinvested, or rolled over, into another IRA within 60 days will be considered ordinary income by the IRS and taxed as ordinary income. The IRS will consider this an early distribution; if you are under age 59 1/2, you will also be charged a 10% penalty.
#2 – One IRA Rollover Per Year
New tax law states that you are only allowed one IRA rollover within a 365 day period.
The way to get around this new law is to use trustee-to-trustee transfers to move your money between your IRA’s. Currently there is no restriction on the number of times you can complete a trustee-to-trustee transfer over a 365 day period. Unlike a rollover where you do take possession of the money, with a trustee-to-trustee transfer the money never touches your hands; it’s moved from one financial institution to the other.
#3 – Same Kind
You must rollover the same type of assets into an IRA. For example, you cannot own stocks in your IRA or 401k plan, sell them and then invest the cash from that sale into another IRA. The IRS considers that type of transaction a distribution and your entire transaction amount is taxable.
#4 – Rollover Options With Your 401k Plan
If you ever leave your employer, do not feel pressured to rollover the money in your 401k plan to an IRA. You have the option of either transferring the money to your new employer’s plan or providing your balance meets the minimum balance amount, you can leave your money in your old employer’s 401k. Take your time and decide which option works best for you.
#5 – Required Minimum Distribution Cannot Be An IRA Rollover
The IRS does not allow your annual Required Minimum Distribution to be rolled into an IRA. If you do, they consider it an excess contribution into the IRA. If you correct this error in a timely manner the IRS will not tax or penalize you.
Follow the rules and you will keep more of your money in your pocket vs. paying it out in taxes and penalties.