Learn More About Rollovers to an IRA

What we’ll cover:

• If you’re rolling over from a 401(k) plan, you can ask your plan administrator to make the payment directly to another workplace retirement plan or to an IRA
• If you have IRAs at different financial institutions and wish to consolidate them under one provider, you could initiate an IRA-to-IRA transfer
• When it comes to choosing an IRA provider for your rollover, consider what features and services are important to you and how much you’re willing to pay for them

Individual Retirement Accounts (IRAs) have limits on how much you can contribute each year. 

But there are no limits on how much you can move into an IRA by rolling over dollars from a workplace retirement plan at a former employer (such as a 401(k) plan) or from an IRA at another financial institution (an IRA-to-IRA transfer). 

However, other limitations may apply depending on how the retirement funds are rolled over. If you’re considering a rollover, here are some important basics to keep in mind. 

401(k) to IRA 

When you leave a company, you generally have a few options for what to do with the money that’s in your 401(k) plan. Your options may include:

• keeping your money in the plan (if your former employer allows it)
• rolling the money to an IRA
• rolling the money to a new employer’s 401(k) plan (if permitted)
• withdrawing the money (which may be subject to income tax and a 10% early withdrawal penalty unless you’re eligible for an exception; visit the IRS or consult a tax advisor for more information.)

Keep in mind that each option may have different benefits, trade-offs and tax implications for your retirement savings. It’s a good idea to consult your financial or tax advisor if you have any questions before initiating a rollover. They can help you weigh the tax and investment implications, as well as other considerations, of each option. 

When it comes to rolling your 401(k) funds from a former employer’s plan to an IRA, generally speaking, no tax is due if you roll over money directly… 

• from a 401(k) funded with pre-tax contributions to a Traditional IRA, or
• from a Roth 401(k) funded with after-tax contributions to a Roth IRA. 

The IRS provides a chart with more information on rollovers here.   

Be aware that how you choose to roll over your funds matters. You can typically choose to do a direct or indirect rollover. 

• Direct rollover. If you’re rolling over from a 401(k) plan, you can ask your plan administrator to make the payment directly to another workplace retirement plan or to an IRA. Contact your plan administrator for instructions. Generally, no taxes will be withheld from your transfer amount.
• Indirect rollover (also known as a 60-day rollover). If you request a distribution from a 401(k) to be paid to you (instead of rolling it over directly to another retirement account), it is typically subject to a 20% mandatory withholding tax. This is even if you intend to roll the money to another retirement account at a later date.

An indirect rollover is typically not recommended because if you don’t put the money (the full amount of the distribution) back into another retirement account within 60 days, you may have to pay income taxes on the distribution and a 10% early withdrawal penalty unless you’re eligible for an exception. (See also: IRS waivers on the 60-day rule.)

This is one reason why it’s often preferable to request a direct rollover when moving money from a 401(k) to another retirement account. 

Good to know: If you have a number of old 401(k) accounts from previous jobs, consolidating them under one account (like an IRA or another 401(k) plan) might make it easier to monitor your funds and invest the money in line with your investing goals. But before moving your money, it is important to review and compare important account details like fees and available investment options. Be aware that some account providers might charge higher fees or offer fewer investment options.

IRA to IRA

If you have IRAs at different financial institutions and wish to consolidate them under one provider, you could initiate an IRA-to-IRA transfer. 

There are two main ways to do this. 

• Trustee-to-trustee transfer. This is where you ask your IRA provider to transfer your retirement funds directly to another IRA (an account that’s at a different financial institution). Generally, no taxes will be withheld from your transfer amount. 
• Indirect rollover (or 60-day rollover). Remember when we talked about indirect rollovers in the last section? The same general rules apply here as well. 

If you request a distribution be paid to you before depositing those dollars into a new IRA, you usually have to pay a withholding tax, which is typically 10% for an IRA distribution (unless you choose to have a different amount withheld). 

You also have to pay attention to the 60-day rule. Generally, you must deposit the money (the full amount of the distribution) into another IRA within 60 days. Otherwise, the distribution may be treated as an early withdrawal, which means you may have to pay taxes and a penalty. 

IRA one-rollover-per-year rule from the IRS: Keep in mind that you generally cannot make more than one rollover from the same IRA within a one-year period. You also cannot make a rollover during this one-year period from the IRA to which the distribution was rolled over.

However, this rule does not apply to: 

• trustee-to-trustee transfers to another IRA
• rollovers from Traditional IRAs to Roth IRAs (conversions)
• IRA-to-plan rollovers
• plan-to-IRA rollovers
• plan-to-plan rollovers

Visit the IRS for more information on this rule. 

Good to know: If you’re thinking about moving money from one IRA provider to another, you may want to do some research to compare the selection of available investments, fees and other services offered. Remember, it’s impossible to know how different investments will perform over time. When it comes to choosing an IRA provider, consider what features and services are important to you and how much you’re willing to pay for them. All other things being equal, lower investment costs typically result in a larger balance over time.