After leaving an employer, individuals may decide to roll over only part of their 401(k) distribution. This process typically entails collecting the distribution check from financial institution and depositing it in an IRA account.
The IRS won’t tax partial rollovers as long as funds are transferring between accounts with similar tax treatments, rather than mixing accounts that may incur taxes. Avoid mixing types of accounts as this could increase tax liability.
Partial rollovers are allowed
If you want to roll over only part of your retirement account, the IRS permits this. But you must adhere to their rules and regulations for such transactions – the financial institution that distributes funds must withhold 20 percent for taxes, which must then be deposited in your new IRA within 60 days otherwise penalties could apply.
Rolls to an IRA may provide access to more diversified investment options than what are offered through employer workplace plans, including individual stocks, mutual funds and exchange-traded funds.
Based on your situation, an indirect rollover may make more sense: distributions will be sent to you via check, and you have 60 days to deposit it into a new IRA. Although this method requires more manual effort than direct transfers, indirect rollovers may be worthwhile if your employer offers superior investment options that are unavailable through retail offerings and individual accounts.
They are taxable
Although many opt to leave their 401(k) funds alone, sometimes it makes sense to move some funds over to an account with similar tax treatments if necessary. Otherwise, your ordinary taxes could take precedence and you could miss out on years of potential tax-deferred growth.
Typically, trustee transfers or direct rollovers between financial institutions are the only ways to do a partial rollover of an IRA account. With trustee transfers, your retirement account custodian wires a specified portion of assets from one institution directly into another institution’s IRA account – this is often seen as the simplest and quickest method.
If you do a partial rollover through an indirect transfer, the financial institution that distributes your funds must withhold 20% for taxes. If this amount is not redeposited within 60 days, taxes at your ordinary income rate will become due and payable.
They are non-taxable
Rollovers in IRA lingo refer to transferring money from one retirement account to another, typically without incurring taxation or penalties. Although this move is generally advised, there may be some rules you need to abide by before initiating one. A professional can assist in understanding them.
One option for doing a partial rollover is using a trustee-to-trustee transfer, wherein your financial institution makes direct deposits from your retirement plan to your new IRA. While this method provides greater security, it requires more work on your part to make sure distributions are reported accurately on tax returns.
An indirect rollover involves withdrawing and redepositing funds within 60 days yourself. While indirect rollovers can be risky due to institutions withholding 20% for federal taxes, you should receive a 1099-R from your retirement plan custodian when doing this type of rollover and report its values on your tax return.
They are reportable
Partial rollover is an attractive solution for those who want to retain part of their 401(k) funds. For instance, if your current employer provides access to an investment that is highly recommended but unavailable in an IRA account, keeping that portion of the account may make sense while rolling over the rest to an IRA account.
Unless a partial rollover is your intent, make sure you report its total value on your tax return. Your 401(k) custodian should provide you with a Form 1099-R that indicates any amount withheld for taxes; then file Form 1040X in order to claim back any unnecessary withholdings.
When it comes to IRA rollovers, it’s wise to consult an experienced financial professional. SmartAsset’s financial advisor matching tool can assist in finding professionals in your local area who specialize in this process.
