Rollovers can help consolidate and save you money on fees if you select an online broker with low account fees and an array of low-cost investments.
Direct rollover is an efficient way of moving funds between accounts without incurring taxes, though some distributions may still need to be reported on your federal tax return.
1. You can’t roll over a Roth IRA
At any one time during any calendar year, all retirement accounts, including traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs, may only undergo one rollover per year to prevent investors from excessively rolling over funds, incurring taxes and incurring the 10% penalty tax. Furthermore, there is a same-property rule which prohibits taking distributions from brokerage accounts to buy stocks with some of that cash before returning it into an IRA (the same one).
Instead, a direct rollover should be performed, which involves sending money directly from one IRA provider to the next (usually via check or trustee-to-trustee transfer). Please consult a wealth professional before moving any money as this could incur further tax complexities. Entrust can assist in your self-directed IRA investments with direct rollovers and other services for multiple IRA accounts – find out more here!
2. You can’t roll over a SIMPLE IRA
SIMPLE IRAs may be tempting for some small business owners, but they might not be suitable for all. One reason could be lower contribution limits than with other retirement account types like solo 401(k) and SEP IRA accounts; another potential drawback may be lack of protection from creditors as other retirement plan options offer more coverage.
In general, the IRS stipulates that you wait two years before moving funds from a SIMPLE IRA into another retirement account to avoid incurring an early distribution penalty of 25% on any distributions received from said SIMPLE IRA.
However, the Protecting Americans from Tax Hikes Act of 2015 amended this rule so you can move funds from a SIMPLE IRA into an IRA after just two years. This change also applies to indirect rollovers between SIMPLE IRAs – although these indirect rollovers tend to be more complicated than direct ones and it’s important that you maintain communication with your former plan administrator to make sure everything runs smoothly.
3. You can’t roll over a SEP IRA
SEP IRAs provide small business owners and the self-employed with an effective retirement savings solution. Easy to set up, these accounts allow employees more investment options than other workplace retirement plans – yet the IRS imposes certain regulations that must be observed.
Employers must contribute an equal portion of each employee’s salary into a SEP IRA; however, this might not be suitable for businesses with many employees.
No taxes or penalties apply when moving money from a SEP IRA into either a traditional or Roth IRA account, through either trustee-to-trustee transfers or 60-day rollovers. Your money remains tax-deferred until distributions commence during retirement – however you must wait at least 73 years old before withdrawing any of it, in order to avoid mandatory minimum distributions and age-based tax penalties.
4. You can’t roll over a 401(k)
Rules regarding IRA rollovers can be complex and challenging to navigate, which makes understanding them all the more crucial to avoid paying unnecessary taxes or penalties.
Direct rollover is the preferred method of moving funds from your 401(k) into an IRA; this means having your plan administrator send a check directly to your new provider rather than passing through tax withholding and the 10% early withdrawal penalty to the IRS.
Another alternative is indirect rollover, in which your plan administrator sends you a check that must then be deposited into your new IRA account by you. However, this method has several drawbacks including higher fees and limited investment options. Furthermore, the IRS places restrictions on how often a rollover between traditional, Roth, SIMPLE, or SEP IRAs can occur in any 12-month period – generally one per account is permitted per 12-months period.
