
When you’re planning for retirement, there are a variety of options when it comes to types of retirement accounts. Along with different account types, there are various ways the accounts can interact when it comes to moving funds, taxes, fees, and penalties. An important aspect to understand involves IRA Rollovers, which allow the transfer of funds from one retirement account to another. There are two ways this can be done:
- Direct IRA Rollover: With a direct rollover, funds get transferred straight from one account to another. You never touch the money, and it avoids tax withholding.
- Indirect IRA Rollover: In an indirect rollover, funds are received by you and deposited again into another retirement account. You have 60 days to complete this transaction. After 60 days, the IRS considers this a withdrawal, therefore creating taxes and penalties.
An IRA rollover may be considered for consolidation purposes, tax advantages, investment flexibility, and/or fee reduction.
An IRA Rollover Breakdown
While the reasoning behind why someone might choose an IRA rollover seems simple, the rules can be quite complex. Without the proper information, unnecessary mistakes can easily be made which can lead to penalties or taxes – and no one wants that. The below chart showcases a simplified breakdown of what retirement accounts can be rolled into others.
FROM | TO | DIRECT ROLLOVER ALLOWED? | TAX CONSEQUENCES | IMPORTANT INFO |
---|---|---|---|---|
Traditional IRA | Roth IRA | Yes | Taxes apply on converted amount | Converting pre-tax funds will trigger taxable income |
Traditional IRA | 401(k) | No | n/a | Rollovers are not permitted |
Traditional IRA | 403(b) | No | n/a | Rollovers are not permitted |
Traditional IRA | SIMPLE IRA | No | n/a | Rollovers are not permitted |
Traditional IRA | SEP IRA | Yes | None | Funds remain tax-deferred |
401(k) | Traditional IRA | Yes | None | Funds remain tax-deferred |
401(k) | Roth IRA | Yes | Taxes apply on converted amount | Direct rollovers require tax withholding unless specified otherwise |
Roth 401(k) | Roth IRA | Yes | None | Ensure compliance with Roth contribution limits |
SIMPLE IRA (2+ years old) | Traditional IRA | Yes | None | SIMPLE IRAs must meet the 2 year rule to be eligible |
SIMPLE IRA (Under 2 years old) | Traditional IRA | No | n/a | Rollovers are not permitted for SIMPLE IRAS under 2 years old |
SIMPLE IRA (2+ years old) | Roth IRA | Yes | Taxes will apply on the converted amount | Subject to the same 2-year rule for eligibility |
403(b) | Traditional IRA | Yes | None | Funds remain tax-deferred |
403(b) | Roth IRA | Yes | Taxes will apply on the converted amount | Direct rollovers may require tax withholding. |
Government TSP | Traditional IRA | Yes | None | Funds remain tax-deferred |
Government TSP | Roth IRA | Yes | Taxes will apply on the converted amount | Ensure compliance with applicable contribution and tax rules |
While this chart breaks down what accounts can rollover into others and which cannot, along with tax consequences and other important information, there are more complex scenarios that can be found on the official IRS rollover chart. Additionally, some employer-sponsored plans can have restrictions on rollovers, so that will need to be clarified with the individual in charge of your company’s plan. This chart highlights common scenarios, but more detailed information should be obtained from a retirement finance professional like those at PlanPerfect.
Maximize Your Benefit With Retirement Specialists at PlanPerfect
The right retirement plan can provide a multitude of benefits and financial gain. A complex set of government guidelines can make it confusing to know the best move without a dedicated guide familiar with the process by your side. At PlanPerfect, we’re committed to providing informed retirement solutions to help our clients retirement plans work better for them. Contact PlanPerfect today to put your company’s retirement plans in our expert hands. Take a look at our client stories to see how our custom plans are tailored to each client’s specific needs.