No matter whether you are switching jobs or providers, understanding how to complete a rollover effectively is critical in order to avoid incurring penalties and incurring tax distributions that could become taxable distributions and incur penalties as part of the transaction.
A direct trustee-to-trustee transfer is usually the simplest and fastest way to rollover an IRA, though other options exist as well.
Rolling over retirement funds into an IRA is one of the most frequent transactions performed with their IRA, yet can be fraught with mistakes if one doesn’t understand its rules. But with some careful consideration and care when making this transition from workplace savings plans into an IRA account, unnecessary taxes and penalties can be avoided.
A direct rollover occurs when the payer transfers directly from your old retirement account into your new IRA. This method is preferred by many as it bypasses the 60-day rule imposed on indirect rollovers or distributions from SIMPLE or SEP IRAs (Publication 560) as well as any 20% mandatory withholding taxes that might otherwise apply.
Direct rollover is relatively straightforward: find a bank, brokerage firm or online investing platform offering IRA accounts and request from your former employer that they send a check directly into the new IRA custodian’s account for you to deposit into it. There’s no limit as to how much money can be transferred into it at one time and it won’t count against your annual contribution limit either.
An indirect rollover is a type of retirement account transaction wherein a retirement plan provides you with a check that can be redeposited into your IRA account later. This typically happens when a participant leaves their company and receives distributions from their 401(k), though other types such as traditional individual retirement accounts and SIMPLE IRAs also allow this. According to IRS regulations, you have 60 days after receipt to redeposit or it will be taxed; only one indirect rollover per year can occur per participant per year.
Mistakes often arise during the rollover process, even for experienced financial planners. Here are a few common ones:
Indirectly rolling over before taking your required minimum distribution (RMD): This mistake typically affects those aged 73 or over and may lead to an excessive contribution liable to an annual 6% penalty fee until corrected.