Retirement Topics - Rollovers of Retirement Plan Distributions
A rollover is a contribution to a retirement plan or IRA of a distribution that you received from another retirement plan or IRA.
The portion of a distribution from a traditional IRA or pre-tax retirement plan account that is not rolled over is generally taxable in the year of the distribution.
See the Rollover Chart for different kinds of allowable rollover transactions.
When should I roll over?
If the distribution from the qualified plan or IRA is paid to you, you have 60 days from the date of receipt to roll it over to another qualified plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations..
One-year waiting period for IRA rollovers: If you make a tax-free rollover of a distribution from an IRA, you generally cannot make another rollover from the same IRA within a one-year period. You also cannot make a rollover from the IRA to which the distribution was rolled over.
Which distributions can I roll over?
IRAs: You can roll over all or any part of any distribution from your IRA except:
- A required minimum distribution, or
- A distribution of excess contributions and related earnings.
Retirement plans: You can roll over all or part of any distribution of your retirement account balance except:
- A required minimum distribution,
- A Loan treated as a distribution,
- A hardship distribution,
- A distribution of excess contributions and related earnings,
- A distribution that is one of a series of substantially equal payments,
- Dividends on employer securities, or
- The cost of life insurance coverage.
Distributions from a retirement plan that can be rolled over are called eligible rollover distributions (ERDs).
Will taxes be withheld from my distribution?
IRAs: IRA distributions paid to you are subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. Withholding does not apply if the distribution is paid directly to another IRA trustee.
Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement account. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.
How much can I roll over if taxes were withheld from my distribution?
If you have not elected a direct rollover, in the case of a distribution from a qualified plan, or you have not elected out of withholding, in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you can make up the withheld amount from other sources.
Example: Jordan, age 42, received a $10,000 eligible rollover distribution from her 401(k) plan. Her employer withheld $2,000 from her distribution.
- If Jordan later decides to roll over the $8,000, but not the $2,000 withheld, she will report $2,000 as taxable income, $8,000 as a nontaxable rollover, and $2,000 as taxes paid. Jordan must also pay the 10% additional tax on early distributions on the $2,000 unless she qualifies for an exception.
- If Jordan decides to roll over the full $10,000, she must contribute $2,000 from other sources. Jordan will report $10,000 as a nontaxable rollover and $2,000 as taxes paid.
If you roll over the full amount of any eligible rollover distribution you receive (the actual amount received plus the 20% that was withheld - $10,000 in the example above):
- Your entire distribution would be tax-free, and
- You would avoid the 10% additional tax on early distributions.
What actions do I need to take to roll over a distribution?
Generally, to roll over your retirement plan or IRA distribution:
- Ask the plan administrator or IRA trustee to transfer the amount to another plan or IRA, or
- Have the distribution paid to you and contribute it within 60 days to another eligible retirement plan.
What happens if I don’t make any election regarding my retirement plan distribution?
The plan administrator making the retirement plan distribution must give you a written explanation of your rollover options, including your right to have the distribution transferred directly to another retirement plan or IRA.
If your distribution is between $1,000 and $5,000 and you don’t elect to receive the money or roll it over, your plan administrator may deposit it into an IRA in your name or may keep the money in the plan.
If your retirement plan account balance is less than $1,000, your plan administrator may pay it to you, less the 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.
Which retirement accounts can accept rollovers?
You can roll your money into almost any type of retirement plan or IRA. See the Rollover Chart for options.
Is my retirement plan required to allow direct rollovers of distributions?
If you receive an eligible rollover distribution from your plan, your plan administrator must provide you with a notice informing you of your rights to roll over the distribution and must facilitate a direct rollover to another plan or IRA.
Is my retirement plan required to accept rollover contributions?
Your retirement plan is not required to accept rollover contributions. Check with your new plan administrator to find out if they are allowed.
Why should I roll over?
When you roll over a retirement plan distribution, you generally don’t have to pay tax on it until you withdraw it from the new plan. By rolling over, you are saving for your future and your money continues to grow tax-free.
If you don’t roll over your distribution, you will pay tax on the amount received (other than qualified Roth distributions) and possibly an additional tax on early distributions.
Additional Resources:
- Notice 2009-75, Rollovers from Employer Plans to Roth IRAs
- Notice 2009-68 (PDF), sample explanations to provide employees explaining rollover rights
- Financial Distress and Retirement Plan Distributions - IRS Nationwide Tax Forum presentation on rollovers and other distribution options
- Publication 590, Individual Retirement Arrangements (IRAs)
- Topic 413 - Rollovers from Retirement Plans
