Managing your retirement plan might involve moving your traditional IRA from one financial institution to another to take advantage of a better investment strategy. When you transfer your funds from one traditional IRA to another, the IRS calls it a rollover IRA.
When you roll over your IRA you must adhere to certain rules. You can avoid losing any of your savings if you understand and follow IRA withdrawal rules and process for rolling over your account.
How to Roll Over a Traditional IRA
Transferring funds from your traditional IRA to your rollover IRA is a straightforward process. Here’s how to roll over your traditional IRA:
- Contact your current financial institution and request a withdrawal of your IRA funds in the form of a check.
- Deposit the check in your rollover IRA account at the new financial institution as soon as possible.
Be prepared for your current financial institution’s representative to fight for your business. He might emphasize the risks of violating the rollover rules and talk about the benefits of leaving your IRA where it is.
If the representative stresses that 10 percent of your funds will be withheld according to IRS rules, don’t panic — this is only partially true. The IRS withholds that amount only if you don’t complete the rollover within 60 days.
Sixty-Day Rollover Rule
IRA rollover rules give you 60 days from the day you withdraw all or part of your traditional IRA from one financial institution to open and roll over your funds to a new IRA account with another institution. If you don’t open your new IRA within 60 days, the money you withdraw will be taxed as regular income. You might be charged an additional 10 percent penalty if you’re under age 59.5 and your withdrawal doesn’t qualify for an exemption.
Don’t withdraw any funds from your traditional IRA unless you’re certain you can open your rollover IRA within 60 days or if your new account has already been opened. If you don’t roll it over in time, the tax consequences will negate the tax advantages you got by opening it.
Limitation Rules on Your Traditional IRA Rollover
The only funds in your traditional IRA you can’t roll over are those that are subject to the required minimum distribution rules. These rules apply when you reach age 70.5, which is when you must begin taking distributions.
The IRS rules limit every traditional IRA owner to one rollover per year. The limit applies regardless of how many IRAs you own.
Find Out: 6 Roth IRA Rules You Need to Know
Rollover Rules for Different Retirement Accounts
One of the benefits of a traditional IRA is that you can roll it over into a number of other types of retirement accounts, including Roth IRAs, qualified 401k plans and government retirement plans. The IRS 60-day rule applies to these rollovers as well. Because other retirement accounts have different IRS transfer and management rules than traditional IRAs, however, the rollover process is more complex and you might be subject to tax consequences even if you do it correctly.
For example, if you roll over your traditional IRA into a Roth IRA, you’ll have to include the amount you roll over in your gross income for the year — and it will be subject to income tax under Roth IRA rules. If you want to make this type of rollover you should schedule a direct transfer of funds between financial institutions or retirement plan managers instead of holding the money for any length of time.
Keep Reading: How to Roll Over Your 401k