By Gary Meeks, RICP®
In this article, I am going to discuss the financial term “rollover.” What is a rollover? Are there different types of rollovers? What are the tax implications?
Direct Rollover: A direct rollover is the transfer of assets from one qualified retirement plan to another with the check being made payable to the receiving company for the benefit of the retirement account owner. The check is not payable to the retirement account owner. No taxes are withheld and there is no limit on how many times a retirement account owner can affect a direct rollover during the year. A direct rollover can be made into an IRA or other qualified retirement plan, such as a 401k, as long as the receiving firm/employer permits.
60-Day Rollover: A 60-day rollover is similar to a direct rollover; however, with a 60-day rollover, the surrendering firm makes the check payable to the retirement account owner. The account owner then has 60 days to make sure the funds get into the receiving firm account. For example, the retirement account owner receives the check payable to him or her, deposits the check into their checking account, then writes a check payable to the receiving firm where the funds will be deposited. If this process is not completed within 60 days, the funds become taxable as ordinary income to the account owner in the amount of the check they received.
The owner could make the rollover check for less than the amount they received with the difference being taxable as ordinary income. It is important to note that if a retirement account participant takes a distribution from a 401k or other employer plan and the check is payable to the participant, the employer will withhold 20% for federal income taxes. A direct rollover is likely a better choice if your intent is to rollover to another employer plan or IRA. Also, under IRS rules, you are only allowed one 60-day rollover per year; this applies only to IRA-to-IRA rollovers but not rollovers from qualified employer plans to IRAs or other retirement plans.
Inservice Distribution or Rollover: If you are participating in a 401k, 403b or other qualified retirement plan, you are often not allowed to request a direct rollover until you have retired or separated from service with the employer; however, an inservice distribution/rollover may be allowed by some employers if the participant has reached a certain age, such as 55. In this case, the participant may rollover some or all the retirement account into an IRA or other qualified plan. This may be advantageous if the participant wants to invest the retirement money into something that is not available with their employer plan or if they prefer more guidance from a financial advisor.
Direct Transfer vs Direct Rollover: The term direct transfer could apply to (IRAs) or non-retirement accounts. Direct transfers are not associated with employer sponsored plans—those are considered Rollovers. A direct transfer is a transfer of an investment account from one provider to another where the check is payable to the receiving provider and not the account owner. Direct transfers are generally associated with like-to-like transfers such as IRA to IRA. There is no limit on the number of direct transfers in a year. With brokerage accounts, a direct transfer can transfer assets in kind to the receiving firm, meaning the account owner moves existing mutual funds or other securities to the receiving firm. This is often done when the IRA owner or account owner is unhappy with their existing advisor or firm.
Roth IRAs & Roth accounts: A Roth account is part of a qualified retirement plan, such as a 401k. A Roth IRA is an Individual Retirement Account with Roth features. Roth accounts can be rolled over into Roth IRAs or into another employer plan Roth account. Roth IRAs can be transferred to Roth IRAs. They cannot be rolled over or transferred to traditional IRAs or tax deferred retirement accounts. A traditional IRA or qualified retirement account that is moved to a Roth is called a conversion and taxes are normally due at the time of conversion.
RMDs (Required Minimum Distributions): A participant who has reached the age of 72 and has not taken a required minimum distribution must do so before a rollover or direct transfer can occur. RMDs do not apply to Roth IRAs or Roth accounts.
Qualified retirement accounts are very portable and can generally be rolled over or transferred into other qualified retirement accounts; some exceptions may apply as noted above. This makes it easy to consolidate accounts if you have several different IRAs or other retirement accounts.
Examples of qualified retirement plans include the IRA, 401k, 403b, 457 plan, SIMPLE IRA, SEP IRA, Keogh plans and Pension plans.
For more guidance pertaining to your situation, seek advice from a CPA/tax advisor or qualified financial professional.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 90 West 100 North Suite 6, Price, UT 84501 (435) 637-8160.
“The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.”
“Distributions from IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½ may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.”