A 60-day rollover allows you to transfer pre-tax retirement savings without incurring taxes and penalties, directly or indirectly. It may be done either directly or indirectly.
Direct transfers involve having the plan administrator send funds directly to your new plan custodian without ever passing through your hands and eliminating concerns regarding 60-day windows or taxes withholding.
Taxes
IRAs provide an important alternative to employer-sponsored retirement plans such as 401(k). With its flexibility and tax benefits, an IRA provides both peace of mind and tax savings. When moving funds between different IRAs however, certain factors must be taken into consideration before moving funds between accounts.
First, your accounts must be compatible. A direct IRA transfer allows money to move directly between institutions without liquidating your original account; while an indirect rollover requires you to personally collect any distribution checks and deposit them into a new IRA within 60 days.
Keep in mind that you can only make one rollover every 12 months between accounts of the same type, such as an IRA, Traditional IRA, SEP IRA or SIMPLE IRA. While pretax contributions to an IRA may be possible depending on its structure, if contributing more is allowed. Also note that an IRA is suitable for holding assets like stocks, mutual funds and real estate investments.
Fees
Rollover IRAs are increasingly common when people switch jobs, retire or otherwise transfer retirement funds from workplace plans to individual retirement accounts. Though usually efficient, this process may still lead to costly mistakes that require paying income taxes and penalties.
Direct IRA rollover involves moving money directly from your old account into your new one. While this option is ideal, it may not always be available. If your employer-sponsored plan provides an indirect rollover payment such as a check for you to deposit into an IRA within 60 days – otherwise taxation of pretax contributions and earnings could occur (although you could later get this money back).
Each year, you may make one IRA-to-IRA transfer; however, this restriction doesn’t apply to trustee-to-trustee transfers or conversions between traditional and Roth IRAs. Consult with a financial professional in order to comply with all the complex regulations involved.
Requirements
Tax and penalty issues must be satisfied when rolling over an IRA into another account, and one requirement is for your new IRA to be at a different financial institution than where funds were initially transferred from. This ensures that it remains an IRA at both institutions, and helps avoid errors when making transfers between accounts. Furthermore, you must complete this transfer within 60 days after dispersal from your original IRA; or direct rollover (where money goes directly from source to new).
If you plan to move funds from an employer-sponsored retirement plan such as a 401(k), be sure to confirm its rules on such rollover. Also take into consideration any contribution limits of the new IRA you plan to open – while traditional and Roth IRAs have contribution caps, SEP and SIMPLE IRAs allow employers to contribute up to 25% of an employee’s compensation (up to $66,000 in 2023) into these tax-deductable accounts.
Options
Rollovers of an IRA may be carried out either directly through transfer or check, with 20% withheld for federal taxes in both instances. Either method must be completed within 60 days, and account types must remain the same (except in the case of SIMPLE IRAs which can only transfer to traditional IRAs).
Individuals often opt to consolidate their IRA accounts when switching jobs, as it provides greater investment options or diversifies retirement assets more broadly. But this process can be costly; therefore, following all rules to avoid incurring taxes or penalties should you do this.
Alternatively, an indirect IRA rollover requires receiving a check from your previous provider with the amount you wish to transfer into your new IRA within 60 days; failure to do so means paying income taxes and an early withdrawal penalty of 10% unless over age 5912. Be sure to keep a record of any transactions made, in case they’re needed during tax time.
