Rollover IRA Tip Sheet

A rollover IRA is an individual retirement account (IRA) that receives assets that are rolled over or transferred from an employer-qualified plan or from other IRAs. A distribution that is directly rolled over is not taxable, and the assets can potentially continue to grow tax deferred until they are subsequently withdrawn.

 

When can assets be rolled over to an IRA from an employer plan?

If someone retires or changes jobs, usually they can take a distribution from their employer plan and roll it over to an IRA. The distribution to be rolled over will generally come from a 401(k), 403(b), 457(b), ESOP, or profit-sharing plan. Also, if a lump-sum option is available from a defined benefit plan, that amount is eligible to be rolled over to an IRA.

There also can be situations in which an employee who is still working may be eligible to take a distribution and roll it over to an IRA. This is called an in-service non-hardship withdrawal (ISNHW) and is permitted by law and can be provided for by the employer retirement plan. The requirements are plan specific. Generally, ISNHWs are allowed for vested plan balances once a plan participant is age 59½ or older. Some plans may also permit employer matching contributions to be eligible for ISNHWs prior to age 59½.

How are rollovers made?

There are two methods by which a rollover can be done: indirect or direct. 

Indirect method. The distribution is made payable from the plan or other IRA to the individual. The individual then has 60 days to roll over the distribution amount to an IRA. Any taxable eligible rollover distribution paid from a qualified retirement plan to the individual is subject to a mandatory income tax withholding of 20%, even if the intent is to roll it over later (the 20% amount withheld would have to be made up from personal funds if a rollover does happen later). If the assets are not rolled over, they are subject to ordinary income taxes, plus a 10% penalty if the individual is under age 59½.

Direct method. The distributable funds are transferred directly “trustee to trustee,” and in this way the individual does not have to worry about the issue of the 60-day rule, and the 20% withholding does not apply. One can make a full or partial rollover. But assets that are not rolled over are subject to applicable income taxes and, if the individual is under age 59½, the 10% premature distribution penalty will apply if no exception to the rule is met.

What options does an employee have after retirement or separation from service?

Upon separation from service or retirement from an employer, participants generally have several options for handling employer plan assets, including: • Keep the assets in the employer-sponsored plan • Roll over some or all of the assets into a new employer’s plan • Roll over some or all of the assets into a rollover IRA • Take a distribution of plan assets and pay income taxes and any penalties that may apply 

IRA participants are allowed only one indirect rollover in any 12-month period across all IRAs they own. When considering a rollover from a retirement plan, clients should be reminded that they have the option, among others, of leaving the funds in their existing plan or transferring them to a new employer’s plan. Clients should be encouraged to evaluate all options available to them in consideration of their retirement savings objectives, retirement plan costs, and other retirement plan features.

Tip sheets are intended solely to highlight some of the key features of a topic. They are not intended to cover all issues, requirements, facets, exceptions, and contingencies within a topic and should be relied upon solely as basis for discussion. This material includes a discussion of tax-related topics. This discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. Neither New York Life Insurance Company nor its agents provide tax, legal, or accounting advice. Before your clients decide to roll over the proceeds of their retirement plans to IRAs or annuities, they should consider whether they would benefit from other possible options, such as leaving the funds in their existing plans or transferring them into a new employer’s plan. Factors that your client should consider are set forth in detail in the “Guide to Suitable Sales.”

 





























 

 



 


 


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