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Commentary

Trustee to Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the one-year waiting period that is required between rollovers, discussed later under Rollover From One IRA Into Another.

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The amount you roll over tax free, however, is generally taxable later when the new plan pays that amount to you or your beneficiary.

Kinds of rollovers to an IRA. There are two kinds of rollover contributions to a traditional IRA. In one, you put amounts you receive from one traditional IRA into another. In the other, you put amounts you receive from an employer's qualified retirement plan for its employees (see Employer plans under Are You Covered by an Employer Plan?, earlier) into a traditional IRA.

Treatment of rollovers. You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans.

Rollover notice. A written explanation of rollover treatment must be given to you by the plan making the distribution. Time Limit for Making a Rollover Contribution You must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. However, see Extension of rollover period, later.

Rollovers completed after the 60-day period. Amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment and must be treated as a taxable distribution from either your IRA or your employer's plan. The amount not rolled over is taxable in the year distributed, not in the year the 60-day period expires. You may also have to pay a 10% tax on premature distributions as discussed later under Premature Distributions (Early Withdrawals).

Treat a contribution after the 60-day period as a regular contribution to your IRA. Any part of the contribution that is more than the maximum amount you could contribute may be an excess contribution, as discussed later under Excess Contributions.

Extension of rollover period. If an amount distributed to you from a traditional IRA or a qualified employer retirement plan becomes a frozen deposit in a financial institution during the 60-day period allowed for a rollover, a special rule extends the rollover period.

The period during which the amount is a frozen deposit is not counted in the 60-day period, nor can the 60-day period end earlier than 10 days after the deposit is no longer frozen. To qualify under this rule, the deposit must be frozen on at least one day during the 60-day rollover period.

Frozen deposit. This is any deposit that cannot be withdrawn because of either of the following reasons.

  1. The financial institution is bankrupt or insolvent.
  2. The state where the institution is located restricts withdrawals because one or more financial institutions in the state are (or are about to be) bankrupt or insolvent.

Rollover From One IRA Into Another

You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in the new IRA.

401k Tips:

Businesses may sponsor 401k savings programs for employees. Through payroll deduction, employees set aside small amounts for deposit into a 401k contract. An employer can make 401k contributions for all or select employees. In such instances, the recipient's reported annual taxable salary will include the contribution, although this amount would then be deducted (conditions permitting) by the employee on his or her year-end tax filing. Target Laboratories (www.targetlab.com) has deployed such a plan for its employees.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. See Recharacterizations in chapter 2 for more information.

Waiting period between rollovers. You can take (receive) a distribution from a traditional IRA and make a rollover contribution (of all or part of the amount received) to another traditional IRA only once in any one-year period. The one-year period begins on the date you receive the IRA distribution, not on the date you roll it over into another IRA.

This rule applies separately to each traditional IRA you own. For example, if you have two traditional IRAs, IRA-1 and IRA-2, and you roll over assets of IRA-1 into a new traditional IRA (IRA-3), you may also make a rollover from IRA-2 into IRA-3, or into any other traditional IRA, within one year after the rollover distribution from IRA-1. These are both allowable rollovers because you have not received more than one distribution from either IRA within one year. However, you cannot, within the one-year period, again roll over the assets you rolled over into IRA-3 into any other traditional IRA.

If any amount distributed from a traditional IRA was rolled over tax free, later distributions from that IRA within a one-year period will not qualify as rollovers. They are taxable and may be subject to the 10% tax on premature distributions.

Exception. An exception to the one-year waiting period rule has been granted by the IRS for distributions made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution. To qualify for the exception, the distribution must satisfy both of the following requirements.

  1. It must not be initiated by either the custodial institution or the depositor.
  2. It must be made because:
    1. The custodial institution is insolvent, and
    2. The receiver is unable to find a buyer for the institution.

The same property must be rolled over. You must roll over into a new traditional IRA the same property you received from your old traditional IRA.

Partial rollovers. If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free into another traditional IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% tax on premature distributions discussed later under Premature Distributions (Early Withdrawals).

Required distributions. Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.

Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over into a traditional IRA established for you, or you can choose to make it your own as discussed earlier (see Inherited IRAs under How Much Can I Contribute?). Also, see Distributions received by a surviving spouse, later.

Not inherited from spouse. If you inherited a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period. For more information, see Beneficiaries, later, under When Must I Withdraw IRA Assets?.

Reporting rollovers from IRAs. Report any rollover from one traditional IRA to another traditional IRA on lines 15a and 15b of Form 1040, or on lines 10a and 10b of Form 1040A. Enter the total amount of the distribution on line 15a of Form 1040, or on line 10a of Form 1040A. If the total amount on line 15a of Form 1040, or on line 10a of Form 1040A was rolled over, enter zero on line 15b of Form 1040, or on line 10b of Form 1040A. Otherwise, enter the taxable portion of the part that was not rolled over on line 15b of Form 1040, or on line 10b of Form 1040A. See Distributions Fully or Partly Taxable under Are Distributions From My Traditional IRA Taxable?.

Rollover From Employer's Plan Into an IRA

If you receive an eligible rollover distribution from your (or your deceased spouse's) employer's qualified pension, profit-sharing or stock bonus plan, annuity plan, or tax-sheltered annuity plan (403(b) plan), you can roll over all or part of it into a traditional IRA.

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution. Generally, an eligible rollover distribution is the taxable part of any distribution of all or part of the balance to an employee's credit in a qualified retirement plan except:

  1. A required minimum distribution, or
  2. Any of a series of substantially equal periodic distributions paid at least once a year over:
    1. Your lifetime or life expectancy,
    2. The lifetimes or life expectancies of you and your beneficiary, or
    3. A period of 10 years or more.

The taxable parts of most other distributions are eligible rollover distributions. See Maximum rollover, later. Also, see Publication 575 for additional exceptions.

Written explanation to recipients. The administrator of a qualified employer plan must, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to you. It must tell you about all of the following.

  • Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan.
  • The requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan.
  • The nontaxability of any part of the distribution that you roll over to a traditional IRA or another eligible retirement plan within 60 days after you receive the distribution.
  • Other qualified employer plan rules, if they apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.

The plan administrator must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made.

However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met.

You must have the opportunity to consider whether or not you want to make a direct rollover for at least 30 days after the explanation is provided. The information you receive must clearly state that you have the right to have 30 days to make a decision. Contact the plan administrator if you have any questions regarding this information.

Withholding requirement. If an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA (or another qualified plan as discussed in Publication 575). However, you can avoid withholding by choosing the direct rollover option, discussed later.

Exceptions. Withholding from an eligible rollover distribution paid to you is not required if either of the following conditions apply.

  1. The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.
  2. The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.
Other withholding rules. If you receive a distribution that is not an eligible rollover distribution, the 20% withholding requirement does not apply. However, other withholding rules apply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a nonperiodic distribution that is not an eligible rollover distribution. For either of these distributions, you can still choose not to have tax withheld. For more information, get Publication 575.

Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA (or to an eligible retirement plan as discussed in Publication 575). Under this option, all or part of the distribution can be paid directly to a traditional IRA (or another eligible retirement plan that accepts rollovers). This option is not required for distributions that are expected to total less than $200 for the year.

Withholding. If you choose the direct rollover option, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA (or other plan).

If any part is paid to you, the payer must withhold 20% of that part's taxable amount. Since most distributions are fully taxable, payers will generally withhold 20% of the entire amount designated for distribution to you.

Choosing the right option. You generally can leave all or part of the distribution in the plan. If you do not leave the distribution in your employer's plan, the following comparison chart may help you decide which distribution option to choose. Carefully compare the following tax effects of each option.

Comparison Chart

Direct Rollover

Payment to You

No withholding.

Payer must withhold income tax of 20% on the taxable part (even if you roll it over to a traditional IRA or other plan).

No 10% additional tax. (See Premature Distributions, later.)

If you are under age 59 1/2, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over.

Not income until later distributed to you from the IRA or other plan.

Any taxable part (including an amount equal to the tax withheld) not rolled over is income.

If you decide to roll over tax free any part of a distribution, the direct rollover option will generally be to your advantage. This is because you will not have 20% withholding or be subject to the 10% additional tax under that option.

If you have a lump-sum distribution and do not plan to roll over any part of it, the distribution may be eligible for special tax treatment that could lower your tax for the distribution year. In that case, you may want to see Publication 575 and Form 4972, Tax on Lump-Sum Distributions, and its instructions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods.

You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over tax free all or part of the distribution. If you roll over any part of the lump-sum distribution, however, you cannot use the Form 4972 special tax treatment for any part of the distribution.

Maximum rollover. The most you can roll over is the taxable part of any eligible rollover distribution from your employer's qualified plan. See Eligible rollover distribution, earlier. The distribution you receive generally will be all taxable unless you have made nondeductible employee contributions to the plan.

Contributions you made to your employer's plan. You cannot roll over a distribution of contributions you made to your employer's plan, except voluntary deductible employee contributions (DECs as defined below), which are treated like employer contributions. If you do, you must treat them as regular (not rollover) contributions and you may have to pay an excess contributions tax (discussed later) on all or part of them.

DECs. DECs are voluntary deductible employee contributions. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These are not the same as an employee's elective contributions to a 401(k) plan, which are not deductible by the employee.

If you receive a distribution from your employer's qualified plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distribution.

No waiting period between rollovers. You can make more than one rollover of employer plan distributions within a year. The once-a-year limit on IRA-to-IRA rollovers does not apply to these distributions.

IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan and roll over part or all of it into one or more conduit IRAs, you can later roll over those assets into a new employer's plan. An IRA qualifies as a conduit IRA if it is a traditional IRA that serves as a holding account or conduit for only those assets. The conduit IRA must be made up of only those assets received from the first employer's plan and gains and earnings on those assets. A conduit IRA will no longer qualify if you mix regular contributions or funds from other sources with the rollover distribution from your employer's plan.

Property and cash received in a distribution. If you receive property and cash in an eligible rollover distribution from your employer's plan, you can roll over either the property or the cash, or any combination of the two that you choose.

Treatment if the same property is not rolled over. Your contribution to a traditional IRA of cash representing the fair market value of property received in a distribution from a qualified retirement plan does not qualify as a rollover if you keep the property. You must either roll over the property or sell it and roll over the proceeds, as explained next.

Sale of property received in a distribution from a qualified plan. Instead of rolling over a distribution of property other than cash from a qualified employer retirement plan, you can sell all or part of the property and roll over the amount you receive into a traditional IRA. You cannot substitute your own funds for property you receive from your employer's retirement plan.

Example. You receive a total distribution from your employer's plan consisting of $10,000 cash and $15,000 worth of property. You decided to keep the property. You can roll over to a traditional IRA the $10,000 cash received, but you cannot roll over an additional $15,000 representing the value of the property you choose not to sell.

Treatment of gain or loss. If you sell the distributed property and roll over all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds (including any increase in value) are treated as part of the distribution and are not included in your gross income.

Example. On September 4, John received a lump-sum distribution from his employer's retirement plan of $50,000 in cash and $50,000 in stock. The stock was not stock of his employer. On September 26, he sold the stock for $60,000. On October 3, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). John does not include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into a traditional IRA.

Note. Special rules may apply to distributions of employer securities. For more information, get Publication 575.

Some sales proceeds rolled over. If you roll over part of the amount received from the sale of property, see Publication 575.

Life insurance contract. You cannot roll over a life insurance contract from a qualified plan into a traditional IRA.

Distributions received by a surviving spouse. A surviving spouse can roll over into a traditional IRA part or all of any eligible rollover distribution (defined earlier) received from an employer's qualified plan or tax-sheltered annuity (or all or any part of a distribution of deductible employee contributions) because of the death of the deceased spouse.

No rollover into another employer qualified plan. A surviving spouse cannot roll over a distribution described in the preceding paragraph into another qualified employer plan or annuity.

Distributions under divorce or similar proceedings (alternate payees). If you (as a spouse or former spouse of the employee) receive from a qualified employer plan a distribution that results from divorce or similar proceedings, you may be able to roll over all or part of it into a traditional IRA. To qualify, the distribution must be:

  1. One that would have been an eligible rollover distribution (defined earlier) if it had been made to an employee, and
  2. Made under a qualified domestic relations order.
Qualified domestic relations order. A domestic relations order is a judgment, decree, or order (including approval of a property settlement agreement) that is issued under the domestic relations law of a state. A "qualified domestic relations order" gives to an alternate payee (a spouse, former spouse, child, or dependent of a participant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it cannot alter the amount or form of the benefits of the plan.

Tax treatment if all of an eligible distribution is not rolled over. If you roll over only part of an eligible rollover distribution, the amount you keep is taxable in the year you receive it. If you roll over none of it, the special rules for lump-sum distributions (5- or 10-year tax option or 20% capital gain treatment) may apply. See Publication 575. The 10% additional tax on premature distributions, discussed later under What Acts Result in Penalties?, does not apply.

Keogh plans and rollovers. If you are self-employed, you are generally treated as an employee for rollover purposes. Consequently, if you receive an eligible rollover distribution from a Keogh plan, you can roll over all or part of the distribution (including a lump-sum distribution) into a traditional IRA (or another eligible retirement plan as discussed in Publication 575). For information on lump-sum distributions, see Publication 575.

More information. For more information about Keogh plans, get Publication 560.

Distribution from a tax-sheltered annuity. If you receive an eligible rollover distribution from a tax-sheltered annuity plan, it can be rolled over into a traditional IRA. It cannot be rolled over into another eligible retirement plan unless that plan is a tax-sheltered annuity plan.

Receipt of property other than money. If you receive property other than money, you can sell the property and roll over the proceeds as discussed earlier.

Conduit IRA. If your traditional IRA contains only assets (including earnings and gains) that were rolled over from a tax-sheltered annuity, you may roll over these assets into another tax-sheltered annuity. If you plan another rollover into another tax-sheltered annuity, do not combine the assets in your IRA from the rollover with assets from another source. Do not roll over an amount from a tax-sheltered annuity into a qualified pension plan.

More information. For more information about tax-sheltered annuities, get Publication 571.

Rollover from bond purchase plan. If you redeem retirement bonds that were distributed to you under a qualified bond purchase plan, you can roll over tax free part of the amount you receive from the redemption into a traditional IRA.

You can redeem these bonds even if you have not reached age 59 1/2. In addition, you can roll over the proceeds, tax free, into a qualified employer plan. However, when you receive a distribution at a later time, it will not be eligible for special 5- or 10-year averaging or 20% capital gain treatment.

Reporting rollovers from employer plans. To report a rollover from an employer retirement plan to a traditional IRA, use lines 16a and 16b, Form 1040, or lines 11a and 11b, Form 1040A. Do not use lines 15a or 15b, Form 1040, or lines 10a or 10b, Form 1040A.

Transfers Incident to Divorce

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax-free. For transfer of interests in employer plans, see Distributions under divorce or similar proceedings (alternate payees), under Rollovers, earlier.

Transfer methods. If you are required to transfer some or all of the assets in a traditional IRA to your spouse or former spouse, there are two commonly used methods that you can use to make the transfer. The methods are:

  • Changing the name on the IRA, and
  • Making a direct transfer of IRA assets.
Changing the name on the IRA. If all the assets in a traditional IRA are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse, whichever applies.

Direct transfer. Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse, whichever applies. Or, if your spouse or former spouse is allowed to keep his or her portion of the IRA assets in your existing IRA, you can direct the trustee to transfer the assets you are permitted to keep directly to a new or existing traditional IRA set up in your name. The name on the IRA containing your spouse's or former spouse's portion of the assets would then be changed to show his or her ownership.


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