5 retirement plan saving and tax options
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Tax rules on rolling over retirement accounts

Since it's unofficial retirement week here at the ol' blog, let's close it out with a look at how to move money from one retirement account to another and not upset the Internal Revenue Service or your nest egg.

Rolling-puppy

Life changes. That means sometimes you want or need to change your retirement plan.

Say, for example, you have a 401(k) at one workplace, get a new job and open a 401(k) with that employer. What happens to the 401(k) you had at your prior job?

In many cases, the company where you worked will let you keep it, although obviously you are no longer contributing.

But many folks don't like that orphan retirement account sitting out there, out of reach and often eventually forgotten.

So they opt to roll it over.

Tax-smart retirement saving moves: Rollovers let you move, according to tax code and IRS rules, one retirement plan into a new one. Or in some cases roll the money into an existing account.

Since there are so many types of retirement plans — check out my preview earlier this week of five ways to save for post-work years — there are a lot of rollover options.

To help answer your retirement plan rollover questions, the IRS created a rollover chart. It's a good guide to what type of retirement plan can (or can't) be moved to another type of retirement account. It comes complete with footnotes for some specific details on certain moves.

If you're considering a retirement account rollover, check out that full PDF version.

But for a quick overview, the table below shows the allowed, or not, rollovers of some of the more common retirement plans.     

Roll From

Roll To

Roth IRA

Traditional IRA

SIMPLE IRA

SEP-IRA

Traditional IRA

Yes

Yes

Yes

Yes

Roth IRA

Yes

No

No

No

401(k)

Yes

Yes

Yes

Yes

SEP* IRA

Yes

Yes

Yes

Yes

SIMPLE** IRA

Yes

Yes

Yes

Yes

*SEP = Simplified Employee Pension | **SIMPLE = Savings Incentive Match Plan for Employees


Again, the table above is very basic, designed just to let you know you whether you have the option to roll one retirement account into another savings plan.

In some cases, even though a rollover is allowed, there are other issues to consider. So once you see you can roll an account into another one, do your due diligence so that you don't mess up the move and face adverse tax consequences.

Two-month deadline: One of the key issues in rollovers is time limits.

A common time frame involved in some rollovers is 60 days. That's how long you have once you personally receive a distribution from a retirement plan to put the money into a new retirement account.

When you actually take possession of the retirement funds, federal taxes will be withheld from the distribution amount. 

An IRA distribution paid directly to the account owner generally is subject to 10 percent withholding. With a retirement plan withdrawal, the withholding amount is 20 percent. These amounts will be reported to you and copied to the IRS on Form 1099-R, with a number or letter code in box 7 detailing the type of distribution.

When that money is withheld from your retirement distribution, in order to transfer the same amount to the new plan as you had in the old account, you'll have to find other funds to make the rollover whole.

Replacing the tax withholding amount in a rollover is a good idea because you want all, not just some, of your former retirement account earning money in the new account.

As for the taxes withheld, you lose that money for a while even if you do use other money to replenish that cut into your rolled over plan. You'll list the withheld taxes on your Form 1040 for the tax year and, if they're not needed to cover any additional tax bill, you'll the money back then.

Direct rollovers are wiser tax moves: You can avoid that temporary loss of retirement funds to taxes by having the amount you're moving sent directly to the plan into which you want it rolled.

There are two ways to do this.

The first is an indirect rollover. You get the distribution check, but it's not made out to you. Instead, your account-to-be-rolled-over administrator issues your retirement distribution as a check that's made payable to your new account.

This doesn't trigger the withholding requirement because even though you get the check and are responsible for sending it to the receiving retirement account, you can't cash it so you don't take tax possession of the money.

I've had this done a couple of times and I admit that I was nervous both times that I'd end up on the IRS hook for taxes. But no. It worked fine.

Then there's the trustee-to-trustee transfer. This is even easier and safer from a tax standpoint because the distribution doesn't ever touch your hands.

Here the financial institution holding your retirement plan directly transfers the funds to the new account. Again, you avoid the 20 percent mandatory IRS withholding.

Direct rollovers take a couple of calls with the distributing and receiving accounts, as well as typically some forms on both sides to complete. So be ready to do a bit of work to get your retirement savings into the account you want.

If you want more info than available here or the IRS full rollover chart, you can check out the IRS' special retirement rollover Web page and/or IRS Publication 590-BDistributions from Individual Retirement Arrangements (IRAs).

And, of course, you always can touch base with a tax professional, who can offer guidance on which retirement plan best fits your personal situation and how to get new and transferred funds into it.

You also might find these items of interest:

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