5 Tips for IRA Rollovers


If you’re considering rolling over your retirement savings to an IRA, you may already be aware of the benefits of an IRA, including tax-deferred investment growth and total control over your savings and future withdrawals.

But before you jump into requesting a distribution from your current plan or IRA, make sure you understand your options and the tax consequences to ensure you’re making the right move for your retirement saving and tax objectives.

1. Evaluate your options

To evaluate and pick the best option for you, you must first determine what type of IRA and IRA services you want. Most financial organizations that offer IRAs provide similar investment options like certificates of deposit and publicly traded mutual funds.

But if you’re looking for the freedom to diversify your portfolio into investments like private equities or real estate, you’ll want to select an IRA custodian with expertise in the custody of alternative investments and in administering self-directed IRAs. You’ll want to evaluate the types of investment they will custody and other service offerings that may be valuable to you, like the option to conduct transactions online, in addition to fees.

2. Pick an IRA type

To maintain the tax-qualified benefits of your savings, you’ll need to establish the right type of IRA to receive the rollover. Most investors moving tax-deferred savings from an employer plan or a Traditional, SEP or SIMPLE IRA will open a Traditional IRA to receive those assets. This maintains the tax-deferred nature of those assets. Some custodians offer a “rollover IRA” to receive rollovers of employer plan assets, but this is generally the same as a Traditional IRA.

If you move tax-deferred retirement savings to a Roth IRA, you’ll have to pay tax on your retirement plan or IRA distribution even if you deposit it all in a Roth IRA. If you’re moving Roth IRA assets or a designated Roth account, you may only move these to a Roth IRA. 

3. Make sure your distribution is eligible for rollover

Most tax-qualified retirement savings are eligible to be rolled over to an IRA, but there are different rules depending on what type of account the assets are coming from. 

  • If you have money in an employer’s 401(k) plan, 403(b) plan or governmental 457(b) plan, you must first be eligible to take a distribution from the plan. Changing jobs or retiring are the most common triggers that will allow you to take a distribution that will be eligible for rollover. Special types of distributions are not eligible to be rolled over, like a required minimum distribution (RMD), a hardship distribution, and corrective distributions.

  • If you have money in an IRA, you are free to withdraw it any time, but you may only make a rollover to another IRA once every 12 months. Like retirement plan rollovers, distributions made to satisfy an RMD or to correct an excess are not eligible to be rolled over. 

4. Determine how to move the money, depending on whether you need access or want to avoid taxation

If you are moving money from an employer plan, you can choose a direct rollover or a 60-day rollover. Each has different tax consequences.

  • A direct rollover occurs when you ask your retirement plan administrator to send your distribution directly to your IRA custodian. You won’t have access to the funds and there are no tax consequences.

  • A 60-day rollover occurs when you take a retirement plan distribution payable to yourself and deposit it in your IRA within 60 days. In this scenario, your plan administrator must withhold 20% of the distribution for federal taxes. This 20% will be taxable to you (and subject to an additional 10% early distribution tax if you’re under age 59½) unless you deposit that amount into the IRA within 60 days as well as the 80% you received from the plan.

EXAMPLE: Myrna, age 62, received a $100,000 eligible rollover distribution from her 401(k) plan. Her employer withheld $20,000 from her distribution and sent it to the IRS. If Myrna rolls over the $80,000 to her Traditional IRA within 60 days, she will report on her tax return $80,000 as a nontaxable rollover, $20,000 as taxable income, and $20,000 as taxes paid.

Depending on her overall tax liability for the year, she may receive a refund of some or all of the $20,000 that was sent to the IRS. To avoid being taxed on that $20,000 that was sent to the IRS, she must come up with $20,000 to complete a rollover of 100% of the plan distribution.

If you are moving money from an IRA, you can also choose a direct or indirect path.

  • A direct transfer from an IRA to another like IRA has no tax consequences, and there is no IRS limit on how often you can transfer assets between IRAs.

  • Once every 12 months, you can withdraw money from an IRA and roll it over to another IRA within 60 days. You can waive withholding on an IRA rollover, so you receive 100% of your withdrawal amount. But if you elect federal withholding or decide to keep a portion of the withdrawal, you must claim that amount as taxable income (and will be subject to the 10% early distribution tax if you are younger than age 59½). Roth IRAs are subject to different taxation rules.

5. Work with a qualified professional

The rules associated with rollovers are complex, and it's helpful to have someone who can guide you through the process. The Mainstar Trust team has 40+ years of alternative asset and self-directed IRA experience. Contact us to learn more about how we can help you with the rollover process. A financial advisor can help you with evaluating your IRA options and identifying suitable investments as well as understanding the rollover rules.