In short, all IRA accounts can be targets for some type of rollover – it just depends on the nature and rules of both the originating account and the target account. You may be facing the decision to perform an IRA rollover because you have a new job or because you’ve left a job and want to consolidate your retirement investments in one place. Unfortunately, some of the things that you’ll need to do throughout the IRA rollover process will be determined by factors beyond your control. The amount of work you’ll need to do depends on the nature of the job you left and the goals you have for your overall investment strategies.
To successfully understand IRA rollovers, you need to be familiar with a few terms. For the purposes of this article, we’ll call the IRA that the funds come from the “original account.” The one you’re setting up to receive the rollover funds is called the “target IRA.” The original account usually comes from an old employer and because it’s already in existence, you have no choice about the nature of that account. The rollover or target IRA, however, is one over which you do have some control, within certain IRS rules. What you’ll want to do is to set up your target account in a way that will allow you to access the simplest and best rollover option – the direct rollover.
A direct IRA rollover occurs when you, as the account holder, contact the manager of the target account and inform him or her to contact their counterpart in the old IRA and ask for a specified amount of money to be sent directly from that account to the new one. Be sure to use the terms “direct rollover.” This starts a very specific process that will maintain the tax deferred status of your money. Know that this is a reportable event, but that the IRS does not consider it a taxable event. Direct rollovers are the smart way to rollover any money, as they keep the value of the funds out of your hands and prevent you from incurring any tax burden for that fiscal year.
In general terms, any type of IRA can be rolled over into the same type of IRA. For example, you can transfer funds from one 401k to another 401k, or from a SEP IRA to another SEP IRA. However there are some accounts that play by different rules. Money in a Roth IRA, for example, can only be rolled over into another Roth IRA, and not to any other type. You can rollover other types of IRAs into a Roth IRA, but you will have to pay taxes on those contributions, which may or may not be the right choice for you. Money in a Simple IRA, on the other hand, can only be rolled over into another Simple IRA, and not to any other type. Aside from these two exceptions, money can usually move between other IRAs – for example, an IRA rollover from a SEP IRA to a 401k is permitted.
The complexity of the tax code doesn’t give you an easy, “one size fits all” answer. There’s no one best answer to the questions you may have when it comes to IRA rollovers. There’s only the best answer for your individual situation. With the advice of your financial team, you’ll be able to determine the best way to set up an account that’s eligible for a direct IRA rollover.