What does IRA Rollover mean?
An IRA Rollover is a tax-free distribution from one retirement account into a Traditional IRA or Roth IRA. The transfer may be made by either direct deposit or issuance of a check. If transfer is done by check, the custodian of the distributing account writes the check to the account holder who then deposits it to an IRA account of his or her choice.
The tax rules permits IRA rollovers. The rollover rule allows you to withdraw money from an IRA account and transfer them to another IRA without any tax, but this is only permitted once per year with the calendar year running from the time of distribution or the transfer of funds. In addition, the deposit to the new IRA account must be made within 60 days after receiving the money.
Those who plan to rollover must bear in mind that the rule prohibits more than one tax-free rollover per year.
The 60-day Rollover Rule
The rollover rule permits that you make the rollover contribution within the 60 day period after receiving the distribution from your retirement account. This may be waived as long as you can demonstrate a significant hardship on your part like the deposit becomes frozen during the 60 day period. In such a case, the time during which the money is frozen does not count towards the 60 day timeframe.
Transfer versus Rollover
There are two ways of moving your retirement money. You either perform a transfer or do a rollover.
If you choose to transfer, you would make arrangements with another financial institution to receive the funds from your current financial institution. The receiving institution would then send a request to the disbursing institution requesting a transfer of funds, which normally is done by check. This does not have to be reported to the IRS and sometimes referred to as direct rollovers and are not subject to the 20% withholding tax.
With a rollover, however, your retirement funds are distributed from the disbursing institution directly to the former account holder. In other words, the check is sent directly to an individual rather than another institution. But unlike transfers, a rollover is reported to the IRS to ensure that the rollover rules are followed and the money is deposited into another qualifying account within the period set by the rollover rule.
Benefits of IRA Rollover
There are many benefits to rolling over your retirement savings. These include:
- More flexibility in the investments you select
- Easier management of your retirement assets
- Consolidated reporting and account statements
- Simplified calculation of required minimum distributions
- Continuation of tax deferred compounding