Newsletter October 2014

Tax Free Rollovers

 

Taxpayers are allowed to make a tax free distribution and transfer of funds from their qualified retirement account to another qualified retirement. This transfer of funds between retirement accounts is called a tax-free rollover.  There are certain requirements that have to followed in order for the rollover to be valid.  In order for a rollover to be tax free the following requirements must be met:

  • Retirement funds must be transferred between qualified retirement accounts as defined by the Internal Revenue Service. The following types of retirement plans would qualify: Traditional IRA, 401 (k), 403 (b), Sec 457
  • You have 60 days to transfer the funds between accounts. The 60 day window starts after either a check is distributed from the account or from date that the funds are electronically transferred from the account
  • After receiving the distribution the taxpayer cannot deposit the check into another non-retirement account and then transfer the funds to the qualified retirement account. If this occurs then this would be a taxable event
  • The distribution of funds from a qualified retirement account cannot be transferred to a Roth IRA without the distribution being taxed
  • Effective January 1, 2015 you may only perform one rollover for every twelve month period. Essentially you are allowed only one rollover in a given year

When rolling over funds between retirement accounts it is always best to transfer funds directly between the retirement custodians/companies. Instead of receiving a check from the retirement account and then depositing that check into the new retirement account it is advisable to have the funds directly transferred between retirement accounts. By doing so, you eliminate the concern of losing the check, damaging the check, or depositing the check into the wrong account. The direct transfer of funds eliminates this possibility and makes the rollover much more efficient.

 

Rollovers occur for a variety of reasons. The primary reason for most taxpayers is that they want to transfer the funds because they are looking for a better type of investment. Another reason is that they are looking for a retirement account that has less costs or fees. In some cases the taxpayer may not have a choice but to rollover to another retirement plan. This type of situation would involve employees who have been terminated or who have left their job and have an employer retirement plan and are required to move that plan to another qualified plan. In most cases this would be a Traditional IRA. Whatever the case may be a tax free rollover gives taxpayers flexibility and control over their retirement accounts without the threat of taxation as long the requirements are followed