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Retirement Topics - Rollovers of Retirement Plan Distributions

 

Generally, a rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.” See our Rollover Chart for all of the different places rollovers can go.

WHY should you roll over?

When you roll over a retirement plan distribution, you generally don’t have to pay tax on it until later, when you take it in cash. Also, by rolling over, you are saving for your future and your money continues to grow tax-free.

Consequences of not rolling over (other than qualified Roth distributions) are paying tax on the amount you received and paying, for some, an additional tax on early distributions.

If you received a distribution from your retirement account upon recently leaving employment and are under age 55, you may have to pay an additional 10% tax on early distribution on the amount you receive. There are situations when the law may exempt you from the additional 10% tax on early distributions.

Distributions from a SIMPLE IRA within the first two years of participation will be subject to a 25% additional tax.

WHAT can you roll over?

You can roll over distributions of all or any part of your retirement account balance that is not any of the following:

  1. A corrective distribution from a qualified retirement plan of excess contributions or deferrals and any income allocable to the excess, or of excess annual additions and any allocable gains,
  2. A distribution to you that is one of a series of substantially equal payments made at least once a year based on your life expectancy, the joint life expectancy of you and your beneficiary or paid over a period of ten years or more,
  5. A Loan treated as a distribution,
  6. Dividends on employer securities, or
  7. The cost of life insurance coverage.

Note: You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a §403(b) plan or to a traditional IRA. The transfer must be made either through a direct (trustee-to-trustee) rollover to a qualified retirement plan or a §403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to an IRA. Any taxable amount that is not rolled over must be included as income in the year of the distribution.

You can roll over a distribution from a designated Roth account to another designated Roth account or to a Roth IRA. If the rollover is to Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Earnings from a designated Roth account may be rolled over using any rollover method.

HOW do you roll over?

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan.

The plan administrator (other than an IRA) making the distribution must give a written explanation of rollover treatment to you. Notice 2009-68 simplifies the presentation of an employee’s options when receiving an eligible rollover distribution. It contains two sample explanations that satisfy the requirements of the notice employers must provide to employees leaving with retirement assets. These sample explanations also reflect law changes -- such as information on a distribution from a designated Roth account under an employer plan -- and to explain rules that apply in special situations -- such as when a distribution is made to a surviving spouse or other beneficiary. This notice “modifies and supersedes” Notice 2002-3. However, the models in Notice 2002-3 (appropriately modified to reflect statutory changes) will continue to be safe harbor explanations with respect to notices provided through the end of 2009. (So, sponsors can immediately move to the models in the new notice, or can continue to use the old models as appropriately modified on a transition basis through the end of 2009.)

Your employer can transfer your distribution directly to another eligible plan or to an IRA. Under this option, the 20% mandatory income tax withholding does not apply. If, when you receive your retirement plan account, it is between $1,000 and $5,000 and you do not choose to receive the money directly or have it rolled over into another plan or IRA, your plan administrator is required to “cash-out” the account by setting up an IRA in your name and then make a “direct rollover” to that account. If your retirement plan account balance is less than $1,000, your plan administrator may pay it to you without your consent less the mandatory 20% income tax withholding. You can still, of course, roll over the amount received as a cash-out within 60 days of receiving it.

WHEN should you rollover?

You have 60 days from the date you receive a retirement plan distribution to roll it over. Remember that any distribution paid to you will already have a mandatory income tax withholding of 20%, even if you intend to roll it over later. If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the 20% income tax withheld. The IRS does have the authority to waive the 60-day rollover requirement in certain situations.

WHERE can you roll over to?

You can roll your money into many different types of retirement arrangements: another retirement plan, an IRA, 403(b) and others. See our Rollover Chart for all of the different places rollovers can go.

Additional Resources:
 


Page Last Reviewed or Updated: September 30, 2009