IRA Money Rollover Rules
Moving money from one individual retirement account to another can lead to penalties and taxes if you are unfamiliar with the rollover rules. A rollover means that you either move your entire IRA or a portion of it from one bank to another, from one employer-sponsored retirement plan to another or from the account directly to you.
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Cash Distribution
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If you close an IRA or move it from an employer plan, you have the option of taking the money directly. With this type of withdrawal, the bank or plan administrator will issue a check to you. If you are under 59 ½, a cash distribution will be taxed at least 20 percent, which includes a 10 percent early withdrawal penalty and a 10 percent flat income tax. In addition, you may end up owing more than the 20 percent if you are in a higher tax bracket.
Indirect Rollover
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An indirect rollover means that you receive the IRA distribution but then redeposit it into another IRA or qualified retirement plan. For this type of rollover to remain free of penalties, you must redeposit your money into another retirement plan within 60 days. If you are moving the money out of your employer's plan, the plan administrator will withhold 20 percent of the total, which is sent to the IRS, so you must arrange for this amount to get re-deposited as well.
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Direct Rollover
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In a direct rollover, the custodian of your IRA, such as your employer or your bank, transfers your money directly to the next custodian. With a direct rollover, you do not receive the money at any time during the transfer. A direct rollover is not subject to taxes or penalties because technically there is no withdrawal. If you simply want to move your retirement account without interruption and the potential for IRS difficulty, the direct rollover is the best choice.
One-Year Rule
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If you are taking a distribution from an IRA on your own, such as from your bank, you can take only one rollover from the account per year. If you move from one employer plan to another, this rule does not apply.
Same Property Rule
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Simply put, the same property rule means that you cannot take a distribution from your IRA, purchase another investment such as stocks or mutual funds, and then attempt to redeposit the proceeds into another IRA account. From the IRS perspective, this counts as a cash distribution and could lead to taxes and penalties.
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