As the Tax Deadline Approaches, Understand the Tax Implications of IRA Rollovers

Published on April 8, 2024

What is an IRA rollover?

An IRA rollover is when someone takes a distribution from a retirement plan and transfers those funds into another account (such as an IRA). This rollover can be triggered when you leave a job and take the funds from an employer-sponsored retirement plan, or if you are a beneficiary who inherits a loved one’s IRA.

Taxable or non-taxable?

As the IRS explains, a distribution that is rolled over is not taxed until the account owner withdraws it from the new plan. This enables the individual to save that money for retirement as it grows tax deferred.

The distribution is taxable if you don’t roll over the payment (unless it is a qualified Roth distribution or the funds have already been taxed). You could also be subject to additional tax if you are not eligible for any of the exemptions to early withdrawals (there are now broader exemptions that came out of the SECURE Act 2.0).

Types of rollovers

These rollovers apply to self-directed retirement plans as well as their traditional counterparts. At Next Generation, we have clients who open a new self-directed IRA to accept a rollover and start investing those funds in alternative assets.

Sixty-day rollover: If a retirement plan distribution is paid directly to you, you must roll that distribution over into another plan or IRA within 60 days to avoid a taxable event. In the event of circumstances beyond your control, the IRS may waive the 60-day period.

Trustee-to-Trustee rollover: This is when the financial institution that holds your IRA makes the distribution payment directly from your IRA to another. No taxes are withheld from the transfer amount in this scenario.

Direct rollover: You can request that the plan administrator (of the original retirement plan) make the payment directly to another retirement plan or IRA. No taxes are withheld in this rollover. You must contact the plan administrator for instructions.

It is best to consult your tax advisor about the best way to handle a rollover for your financial circumstances.

Two rollover exclusions:

The IRA distribution cannot be a required minimum distribution (RMD) or a distribution of excess retirement plan contributions and related earnings. For workplace retirement plans, the same rules apply with additional exceptions. You can find the full list here.

Rollover limitations

In general, taxpayers are limited to one rollover from a) the same IRA or b) from the IRA to which the distribution was made within a 12-month period. This one-rollover-per-year rule applies to the aggregate of all of an individual’s IRAs (Traditional, Roth, SIMPLE, SEP). However, there are some exceptions to this one-per-year rule for rollovers:
• from a Traditional to Roth IRA (a Roth conversion)
• from a qualified retirement plan to an IRA (plan-to-IRA)
• between two qualified retirement plans (plan-to-plan)
• trustee-to-trustee transfers to another IRA

Tax withholding from retirement plan distributions

As noted above, there is no tax withholding when the rollover is a trustee-to-trustee transfer or a direct rollover between plans or IRAs. Taxes are only withheld when the IRA or plan distribution is paid to you directly.

• With an IRA, the direct distribution is subject to 10% withholding unless you choose to elect out of withholding or elect to have a different amount withheld.
• On retirement plan distributions paid directly to you, the tax withholding is 20%.

As always, we highly recommend you consult your trusted financial or tax advisor about these issues before executing a rollover, and to make sure you are properly reporting nontaxable and taxable income. If you have a question about making a rollover into a new self-directed IRA, you can always contact our team at NewAccounts@NextGenerationTrust.com or 888-857-8058. If you are ready to open a new self-directed IRA and fund it with a distribution rollover, you can “get rolling” with our starter kits.