Rollover IRA

What is a Rollover IRA?

A rollover IRA is a special type of IRA that is used to receive distributions from an employer sponsored qualified plan such as the 401(k) or profit sharing plans.  Rollover IRA's are also now allowed to be rolled back into the new employers 401(k), 403(b), and 457 plans.

It is very important you keep your rollover IRA assets separted from your traditional IRA assets.  If you do not, you will lose the ability to move your rollover IRA assets into your new employers retirement plan. 

Is There a Limit to the Size of Assets that I move into a Rollover IRA?

No.  There is no cap on the amount of money that can be rolled into a rollover IRA.

Will There be any tax consequences as a result of a Rollover Transaction?

If the qualified plan from your employer makes a distribution directly to you, instead of the rollover IRA account, you have up to 60 days from the receipt of the check to deposit it into the rollover IRA account.  If you do not and you are under the age of 59 and a half, you will owe a penalty of 10% of all funds on top of all applicable taxes related to this balance.  Once you lose this time window, that money cannot be re-inserted into an IRA format where you would be sheltered from the yearly taxes.

Common Mistakes People Make with Rollover IRAs

There are a few common mistakes people make when dealing with Rollover IRAs.  Let's review some of them so you do not suffer the same fate.

1)  There is a "Same Property Rule" which states that you cannot take a cash distribution from your IRA and purchase other assets, only to take these newly acquired assets and deposit them into another IRA.  The IRS will consider this as a cash distribution and this will be a taxable event.

2)  If you merely want to use another broker to manage your Rollover IRA, ask the broker to "transfer" the assets rather than completing an entirely new rollover.  A new IRA rollover brings with it risks, such as the 60 day rule we discussed above.  Additionally, you are allowed to perform unlimited "transfers" for the life of the IRA, but you can only perform 1 rollover every year. 

3)   There is a one year waiting rule on distribution of assets from your IRA to another IRA.  For example, you are only allowed to withdraw assets from an IRA one time per year for the purposes of adding these funds into another IRA.  Same goes for IRA's that received funds from another IRA.  You cannot withdraw or receive new funds again for 1 year.  The exception to this rule is a distribution from an employer sponsored qualified plan.

Tim Ord
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