If you’re saving for retirement and getting ready to retire, you have probably heard people talking about rolling over their 401(k). A rollover is how you get your funds into your IRA! These terms are often used interchangeably, but they actually mean different things. Let’s talk about the differences.
There are important distinctions between a transfer and a rollover – differences that matter to the IRS. There are different rules and requirements that can impact your taxes if reported incorrectly.
Transfers
An IRA transfer is the most basic way to move assets from one IRA account to another. The assets are moved directly from one IRA provider to another- the money never comes to you – and this transaction is not reported to the IRS. You can transfer your account as many times as you want in any time frame you want- there are no limits or restrictions on transfers between an IRA and a financial institution.
Keep in mind, when transferring IRAs, your account must be going into another like registered account. For example, a Roth IRA must move to a Roth IRA and a Traditional IRA must move to a Traditional IRA. You cannot move a Traditional IRA directly to a Roth IRA; a Roth conversion must be performed first.
Rollovers
There are two things the IRS refers to as a rollover or rollover IRA.
A direct rollover is when moving funds from a qualified retirement plan or an employer-sponsored plan, like a 401(k), into a Traditional IRA. The funds are sent directly from one provider to another. In practice, this is a lot like a transfer but with different paperwork and the IRS knows it happened. Even though this is reported to the IRS, there are no taxes on your funds since you are rolling them into another retirement account.
An indirect rollover, also known as a 60-day rollover, is one where you personally take possession of the funds before putting them back into an IRA within the 60-day window. For example, you take a distribution by check and deposit those funds into a personal bank account. You then write a check from that account and send it to your new IRA provider within 60 days of the initial distribution to deposit to your account- this is an indirect rollover. You must deposit this money back into a retirement account within 60 days to prevent the IRS from taxing these funds.
With an indirect rollover, the IRS only allows one in a 12-month period. This applies to all individual retirement accounts – you are allowed one IRA rollover, no matter how many accounts you have. For the tax year the rollover occurred, you will receive a 1099-R from the company you are moving the funds from and a 5498 from IRA Trust.
If you have additional questions about the process, please let us know- we’re happy to discuss the options with you in greater detail. We have Lockheed Martin specialists standing by and ready to assist. If you’d like to learn more, give us a call today at 817-210-3444 or click HERE to book a complimentary consultation.
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