Transferring Money While Working
Most employer-sponsored retirement plans do not allow you to transfer money from the plan while you are still working. You can contact your plan sponsor to see if they allow what is called a “in-service distribution.” The plan does not have to offer this option.
Tax Implications When Transferring Money from a Workplace Plan to an IRA
If a distribution is paid directly to you, 20% of it must be withheld for federal taxes. This amount is sent directly to the IRS. This applies even if you plan to roll the distribution into a traditional IRA. You can avoid mandatory tax withholding by choosing the direct rollover option, where the check is paid directly to your new financial institution.
Transferring Money from One IRA to Another
An IRA transfer occurs when you move IRA funds from one financial institution to another, typically between similar accounts (for example, a traditional IRA at one institution can be transferred to a traditional IRA at a new institution). As long as there is no distribution owed to you, the transfer is tax-free.
Using IRA Funds Tax-Free if Re-deposited Back into an IRA
If you withdraw funds from an IRA and then redeposit them into your IRA within 60 days, that transaction will not be taxed. You can only do one of this type of rollover once in any 12-month period. This once-per-year limit does not apply to direct transfers between financial institutions from one institution to another.
Using Rollover to Transfer Part of the Account
Luckily, IRA rollovers are not an all-or-nothing process. You can use a rollover to transfer a portion of your funds from one IRA to another, or once you retire, to transfer a portion of your employer-sponsored retirement plan into an IRA.
Inheritances and Transfers to Your Own Account
If you inherit a traditional IRA from your spouse, you can transfer the funds to your own IRA, or you may choose to designate it as an inherited IRA. There are pros and cons to each option.
Required Minimum Distributions for Rollover
Amounts that must be distributed during a particular year according to the required minimum distribution rules are not eligible for treatment as an IRA rollover. However, you can distribute shares of investments from your IRA to meet the required minimum distribution. These shares can remain invested in a non-retirement brokerage account. Whether you take a cash distribution or shares, any amount distributed from your IRA will be reported on Form 1099-R and included in your tax return as income.
Reporting Rollover Transactions on Your Tax Return
IRA rollovers are reported on your tax return but as a non-taxable transaction. Even if you correctly execute an IRA rollover, it is possible for the plan sponsor or agent to incorrectly report it on Form 1099-R that they issue to you and the IRS. I have seen this scenario multiple times in my career.
Converting Pre-Tax Funds to a Roth IRA
Recent tax laws confirm that pre-tax funds in a qualified employer plan can be rolled over to a Roth IRA. This is a great option since Roth IRA funds grow tax-free, and you will not be required to take required distributions from a Roth IRA.
Transferring Company Stock from the Plan to an IRA
You may be able to use a special tax rule to distribute company stock from the plan once you are retired or no longer work there. It is a distribution option called “net unrealized appreciation.” Some 401(k) plans may allow you to transfer existing stock directly to an IRA. Many institutions require the funds to go to your IRA in cash rather than stock. Check with your 401(k) plan’s custodial institution to determine what distribution options are permitted.
Questions
Frequently Asked Questions (FAQs)
Do I have to roll over my 401(k) into an IRA as soon as I leave my job?
Rolling over your 401(k) into an IRA is not your only option. However, to avoid taxes and penalties, you’ll want to keep those funds in your current plan if your employer allows it, or roll them over into a new IRA, transfer them into an existing IRA, or move them to another 401(k) plan. If you keep 401(k) or IRA funds for more than 60 days, you will be subject to taxes and a 10% penalty if you are under age 59 and a half.
Can I have more than one IRA account?
You can own more than one IRA account. For example, you can have a traditional IRA and a Roth IRA. Contribution limits for the amount you can contribute to an IRA apply across all IRA accounts you own. For 2022, the contribution limit for an IRA is $6,000 for individuals under age 50, and $7,000 for those age 50 and over.
Can I roll over my IRA as much as I want?
The IRS limits the number of rollovers you can do. You can only do one rollover from one IRA to another or the same IRA in any 12-month period. There are some exceptions to this limit.
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Sources:
IRS. “Rollovers of Retirement Plan and IRA Distributions.”
Putnam Investments. “In-service, Non-hardship Withdrawals.”
IRS. “Retirement Topics – Beneficiary.”
IRS. “Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs).”
IRS. “Rollovers from Employer Plans to Roth IRAs.” Accessed April 18, 2020.
IRS. “Internal Revenue Bulletin: 2009-39.”
IRS. “Traditional and Roth IRAs.”
IRS. “Rollovers of Retirement Plan and IRA Distributions.”
Source: https://www.thebalancemoney.com/how-to-navigate-ira-rollover-rules-2388704
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