Retirement Plan Rollovers

For this blog entry, I thought I'd piggyback a bit on last month's midyear tax withholding checkup theme. I've read several personal finance columns in the last few weeks and one the considerations they offer to their readers (due to the uncertainty of where taxes and tax rates may be in the future) is an IRA rollover from a traditional to a Roth IRA. Doing such would have you generally paying your taxes (on the distribution) now instead of later as distributions from a Roth are tax free. Most financial advisors will suggest that you NOT use the funds from the IRA to pay any taxes owed but will leave it to you to find more on that aspect of things. For this, my thought is just make you aware of what is needed tax-wise if you decide to look further into it.  

More on the differences, by the way, between a Traditional and Roth IRA is here.

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan. This transaction is normally not taxable but it is reportable on your 1040. You can roll over most distributions from an eligible retirement plan except for:

1. The nontaxable part of a distribution, such as your after-tax contributions to a retirement plan (in certain situations after-tax contributions can be rolled over),
2. A distribution that is one of a series of payments based on your life expectancy, or the joint life expectancy of you and your beneficiary, or paid over a period of ten years or more,
3. A required minimum distribution,
4. A hardship distribution,
5. Dividends on employer securities, or
6. The cost of life insurance coverage.

Any taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution.

If a distribution is paid to you, you have 60 days from the date you receive it to roll it over to another eligible retirement plan but going from trustee to trustee is usually best.

In general if you are under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions unless an exception applies. Those exceptions and everything else you ever wanted to know about an IRA are spelled out in IRS Publication 590, Individual Retirement Arrangements. Also, for further information about rollovers and transfers, take a look at/in Publication 575, Pension and Annuity Income.