Five Things

According to the Bureau of Labor Statistics, the average worker currently holds ten different jobs before age forty, and this number is projected to grow. The BLS also reported that the median employee tenure is between 4.0 and 4.3 years with men lasting a little longer than women.

Each job change brings the potential need to roll over retirement funds, which can be tricky with serious consequences if not done correctly. With job changes as frequent as they are today, it's important to understand how to roll over retirement funds correctly.

Here are 5 things every IRA owner needs to know before they decide to roll over an IRA. Knowing this might get confusing, let us start with the end in mind:

Rollover rules are complicated with a number of potential pitfalls.
The best strategy is to use transfers and direct rollovers.
The simplest way to think about this is "don't touch the money."

1. How rollovers work

An “indirect rollover” takes place when a distribution is made to you from your company retirement plan or an IRA and you take receipt of those funds with the intention of putting them back into a different or newly established IRA.

A "direct rollover" takes place when a company plan transfers your assets to another company plan or an IRA. While this transaction is called a "rollover," it is very different from an indirect rollover because you never take receipt of the funds. This type of rollover avoids the mandatory 20% withholding that applies to rollover-eligible distributions because this is not a taxable event to the IRA owner.

2. The 60-day rule

There is a 60-day window to complete an indirect rollover, and the 60-day clock starts ticking when the distribution is received. You can use those funds for any purpose during that window, but the distribution becomes taxable and subject to penalties if the deadline is missed. While there are some very limited exceptions, if the deadline is missed, the rollover window is closed. To avoid this outcome, complete rollovers as soon as possible.

3. The once-per year rollover rule

IRA-to-IRA or Roth-to-Roth rollovers are subject to a once-per-year rule. For purposes of this rule, traditional and Roth IRAs are combined. This means that a distribution and subsequent rollover between your Roth IRAs will prevent another rollover within a one-year period between either your traditional IRAs or other Roth IRAs. This rule limits you to only one rollover of IRA funds every 12 months. Rollovers from a company plan to an IRA or from an IRA to a company plan are not subject to the once-per year rollover rule because they are transfers. Roth conversions are not subject to the rule either.

4. No Rollover of RMDs

Once you turn 70 ½ you must take out a required minimum distribution (RMD) from your IRA each year. RMDs cannot be rolled over and must be reported as income. You can take out distributions in excess of the RMD and roll them over but not until you have distributed the RMD. This rule does not apply to transfers between IRAs. You can transfer your entire account to a new IRA and then take the RMD later.

5. Other Rollover Pitfalls

There are other rollover pitfalls to be aware of. Non-spouse beneficiaries attempting to rollover retirement funds is not allowed. If a non-spouse beneficiary receives a distribution from an IRA or a company plan, they may not roll over those funds, they are taxable at the time of distribution.

That Every IRA Owner Should Know

Summary

Rollover rules are complicated. The simplest solution is to use transfers and direct rollovers, and not touch the money. If you never personally receive a distribution, and all moves are made between the old and newly established IRA, you have very little to worry about. That's because transfers avoid the 60-day rule and the once-per-year rollover rule, so there is no concern about missed deadlines or frequency of transfers.

Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.