IRA Rollover

An individual retirement account rollover is a transfer of funds from a retirement account into a traditional IRA or a Roth IRA. This can occur through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account. These accounts are typically provided by brokers and you can learn more about where to get these accounts with Investopedia's list of the best brokers for Roth IRAs. 

IRA rollovers can occur from a retirement account such as a 401(k) into an IRA, or as an IRA-to-IRA transfer. Most rollovers occur when people change jobs and wish to move 401(k) or 403(b) assets into an IRA, but some occur when account holders want to switch to an IRA with better benefits or investment choices.

To engineer a direct roller over, an account holder needs to ask his plan administrator to draft a check and send it directly to the IRA. In IRA-to-IRA transfers, the trustee from one plan sends the rollover amount to the trustee from the other plan.

If an account holder receives a check from his existing IRA or retirement account, he or she can cash it and deposit the funds into the new IRA. However, he or she must complete the process within 60 days to avoid income taxes on the withdrawal. If he or she misses the 60-day deadline, the Internal Revenue Service treats the amount like an early distribution.

In direct transfers, the IRS withholds no taxes. Rather, the entire amount transfers directly from one account to another. However, if the account holder receives a check he or she deposits into the IRA, the IRS insists upon a withholding penalty. Custodians or trustees must withhold 10 percent on checks from IRA distributions and 20% on distributions from other retirement accounts, whether or not the funds are for a rollover. At tax time, this amount appears as tax paid by the tax filer.

However, if an account holder receives a distribution from a Roth IRA to rollover into a traditional IRA, he does not have to pay any taxes on the distribution or report it as income as the IRS does not tax distributions from Roth IRAs.

Many IRAs only allow one rollover per year on an IRA-to-IRA transfer. The one-year calendar runs from the time the account holder made the distribution, and it does not apply to rollovers between traditional IRAs and Roth IRAs. Individuals who do not follow this rule may have to report extra IRA-to-IRA transfers as gross income in the tax year the rollover occurs.