Definition
An Individual Retirement Account (IRA) Rollover is a provision under the IRA law that permits individuals who receive lump-sum payments from their company’s pension or profit-sharing plans—triggered by retirement or termination of employment—to transfer the funds tax-free into an IRA investment plan within 60 days. This rollover allows the individual to defer taxes on the lump-sum payment and avoid immediate tax liabilities.
Examples
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Direct Rollover: John retires and receives a lump-sum payment from his employer’s pension plan. He arranges for the payment to be transferred directly into his IRA. Because this is a direct rollover, the distribution is not subject to tax withholding, and John avoids immediate taxation and penalties.
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Indirect Rollover: Sarah is leaving her job and receives a $100,000 lump-sum payment from her profit-sharing plan. She receives a check and decides to deposit it into her IRA within 60 days. The plan administrator withholds 20% ($20,000) for taxes, so Sarah receives $80,000. To roll over the full amount tax-free, Sarah must deposit $100,000 into her IRA by using additional funds to cover the $20,000 withheld. If she only deposits the $80,000, the remaining $20,000 is treated as a taxable distribution and may incur penalties.
Frequently Asked Questions (FAQs)
What is an IRA rollover?
An IRA rollover allows individuals to transfer eligible retirement plan funds from one account into an IRA without incurring tax penalties, provided the transfer occurs within 60 days.
Who is eligible for an IRA rollover?
Individuals who receive a lump-sum distribution from their employer’s retirement plan due to retirement or termination of employment are eligible for an IRA rollover.
What happens if the rollover is not completed within 60 days?
If the rollover is not completed within 60 days, the distribution is subject to income tax and possible early withdrawal penalties.
What is a direct rollover?
A direct rollover involves transferring funds directly from one retirement account to another, avoiding the 20% mandatory withholding tax.
What is an indirect rollover?
An indirect rollover occurs when the account holder receives the distribution and deposits it into another retirement account within 60 days. The payor must withhold 20% of the distribution amount for taxes.
Is there a limit on how many IRA rollovers I can do in a year?
Yes, under IRS rules, you can perform only one IRA-to-IRA rollover per 12-month period.
Can I roll over funds from a Roth IRA?
Yes, funds from a Roth IRA can be rolled over to another Roth IRA. Traditional IRA funds can be rolled over to another traditional IRA or Roth IRA, but the latter may trigger taxes.
Related Terms
- Direct Rollover: A transfer of assets from a qualified retirement plan directly to an IRA, thus avoiding withholding taxes.
- Indirect Rollover: A transfer of assets where the recipient handles the transfer and must complete it within 60 days to avoid taxes and penalties.
- Mandatory Withholding: The automatic withholding of 20% of a distribution for tax purposes when the funds are not directly rolled over to another retirement account.
- Qualified Retirement Plan: Employer-sponsored retirement plans like 401(k), 403(b), and profit-sharing plans.
Online References
- IRS: Rollovers of Retirement Plan and IRA Distributions
- Investopedia: IRA Rollover
- Fidelity: Understanding IRA Rollovers
Suggested Books for Further Study
- “The Bogleheads’ Guide to Retirement Planning” by Taylor Larimore, Mel Lindauer, Richard A. Ferri, and Laura F. Dogu
- “IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment” by Patrick W. Rice
- “Retirement Planning Made Simple: The 401k Manual” by Marvin Trojan
Fundamentals of Individual Retirement Account (IRA) Rollover: Finance Basics Quiz
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