When it comes to IRAs, there are two different ways to rollover your assets between different IRA accounts. The first is what’s known as a transfer, or direct rollover. In this rollover process, one financial institution sends a request to the other for a transfer and the disbursing institution sends a check in return. Because the funds are never transferred to the IRA account holder, the process is not considered to be taxable by the IRS.
The second form of rollover is known as an indirect rollover, or a 60 day rollover. In this case, the original financial institution makes out a check directly to the IRA holder, who must then deposit this IRA rollover contribution into the receiving institution within 60 days. If this deadline of IRA rollover isn’t met, the funds will lose their status as IRA funds, meaning that they may be taxed as ordinary income and subject to additional penalties.
A few additional rules apply to rollover IRAs. For example, a person can only make a rollover deposit once every 12 months from the same account. If they have more than one IRA, they can make a rollover deposit from each. A rollover is reported to the IRS, although this is typically handled by the receiving institution and doesn’t mean that taxes will come due on the rolled over funds.
Another common type of rollover involves moving assets from an employer-sponsored retirement account into a personal rollover IRA. These accounts have no IRA rollover limits on them, so you’re free to move as much money as you like from one account to the other. Why do this? In many cases, personal IRAs offer a greater range of investment options – and thus, a higher potential rate of return – than most employer-sponsored plans, which are typically highly restricted.
But what type of retirement plans are actually eligible to be moved into a rollover IRA? In fact, there are several, including the following:
- Profit-sharing plans
- 403(b) accounts
- 401(k) accounts
- QRP/Keogh accounts
- SEP IRAs
- Simple IRAs
In addition to these types, defined benefit plans and ESOP accounts may also be eligible, although there may be some additional stipulations to rolling over an IRA that has these types of contributions from the employer. In order to complete this type of rollover, you’ll need to have reached retirement age, became disabled, or left the company altogether. You may also be eligible for a rollover if your past employer terminates the retirement plan.
If you don’t want to rollover your assets from a previous employer’s IRA into a rollover IRA, you do have a few other options. The first is to transfer the funds to the new employer’s retirement plan. Another option is to simply leave the funds in the previous employer’s retirement plan, where they will continue to accrue interest. Finally, you can cash out the retirement plan, but you’ll incur some penalties and will have to pay the IRS taxes on the money, which can result in a net loss of 50% of the IRA funds. In most cases, an IRA rollover is the option that will best advance your retirement goals.