Retirement Plan and IRA Rollovers: Rules, Deadlines, and Tax Traps to Avoid

Changing jobs, retiring, or consolidating old accounts often brings up an important question: What should you do with the money in your retirement plan or IRA?

A rollover can help you move retirement savings from one eligible account to another while generally preserving their tax-deferred status. But the method you choose matters. Missing a deadline, overlooking withholding, or rolling over an ineligible distribution can create an unexpected tax bill. Below, Kamish & Associates explains the key retirement plan and IRA rollover rules, based on current IRS guidance, and highlights the decisions to make before moving your money.

What Is a Retirement Account Rollover?

A rollover is the movement of money from an eligible retirement plan or IRA into another eligible retirement account. Most pre-retirement payments from a retirement plan or IRA can be rolled over, either through a direct transfer or by depositing the distribution into another account within the required timeframe.

When completed correctly, a rollover generally allows you to postpone income tax until you take withdrawals from the receiving account. If you keep the distribution instead, the taxable portion is generally included in income, and an additional 10% tax may apply to an early distribution unless an exception is available.

Three Ways to Complete a Rollover

Direct rollover If the money is coming from an employer retirement plan, such as a 401(k), you can ask the plan administrator to send the payment directly to another eligible retirement plan or IRA. The payment may also be issued as a check payable to the receiving account. Federal income tax is not withheld from a properly completed direct rollover.

Trustee-to-trustee transfer For an IRA, you can ask the financial institution holding the account to transfer the money directly to another IRA or an eligible retirement plan. Because the funds do not come to you, taxes generally are not withheld from the transfer amount.

60-day rollover If the distribution is paid directly to you, you generally have 60 days from the date you receive it to deposit all or part of the money into an eligible retirement plan or IRA. Withholding can make this option more complicated, especially for distributions from employer plans.

PRACTICAL TAKEAWAY: A direct rollover or trustee-to-trustee transfer is often the cleanest way to move retirement funds because the money does not pass through your hands and withholding generally does not reduce the amount transferred.

The 60-Day Rollover Rule

When a distribution is paid to you, the 60-day clock starts on the date you receive it. To keep the eligible amount from being treated as a taxable distribution, you must complete the rollover within that window.

The IRS may waive the 60-day requirement in certain situations when the deadline was missed because of circumstances beyond your control. However, relief is not automatic. If you are close to or past the deadline, get professional guidance before taking further action.

How Withholding Can Create a Surprise

Withholding rules differ depending on the type of account and how the money is paid:

• IRA distributions paid to you are generally subject to 10% withholding unless you elect out or choose a different amount. A trustee-to-trustee transfer can avoid withholding.
• Eligible retirement plan distributions paid to you are generally subject to mandatory 20% withholding. A direct rollover to another plan or IRA avoids that mandatory withholding.

Suppose you request a $20,000 eligible distribution from a former employer's 401(k) and the payment is made directly to you. The plan generally withholds $4,000 and sends you $16,000. To roll over the full $20,000 within 60 days, you would need to contribute the $16,000 received plus $4,000 from another source. If you roll over only the $16,000, the $4,000 withheld is generally treated as a taxable distribution, even though it was sent to the IRS as withholding. An additional 10% tax may also apply unless you qualify for an exception.

The IRA One-Rollover-Per-Year Rule A common point of confusion is the one-rollover-per-year limit for IRA-to-IRA rollovers. In general, you may make only one rollover from an IRA to another IRA in any 12-month period, regardless of how many traditional, Roth, SEP, or SIMPLE IRAs you own.

The limit generally does not apply to:

• Trustee-to-trustee transfers between IRAs
• Traditional IRA-to-Roth IRA conversions
• IRA-to-plan rollovers
• Plan-to-IRA rollovers
• Plan-to-plan rollovers

If you exceed the limit, the second distribution may be taxable and may be subject to the 10% additional tax on early distributions. Depositing the money into an IRA may also create an excess contribution subject to a 6% annual tax while it remains in the account.

Which Distributions Cannot Be Rolled Over?

Not every retirement distribution is eligible for rollover treatment. For IRAs, required minimum distributions and distributions of excess contributions and related earnings cannot be rolled over.

For employer retirement plans, ineligible amounts generally include:

• Required minimum distributions
• Certain plan loans treated as distributions
• Hardship distributions
• Distributions of excess contributions and related earnings
• Certain substantially equal periodic payments
• Certain other specialized distributions, including some insurance payments and employer securities dividends

Plan rules also matter. You must satisfy the plan's requirements for taking a distribution, and the receiving plan is not required to accept rollover contributions. Confirm both sides of the transaction before requesting the transfer.

What If You Do Not Make an Election?

Your plan administrator must provide a written explanation of your rollover options. If you no longer work for the employer and your account falls within certain small-balance rules, the plan may move the money to an IRA in your name or pay it directly to you, depending on the balance and the plan's terms. A payment made directly to you may be reduced by 20% withholding, although you may still be able to complete a rollover within 60 days.

Common Rollover Mistakes to Avoid

• Waiting until the end of the 60-day period to open or fund the receiving account
• Assuming the amount you receive is the full distribution when taxes were withheld
• Applying the IRA one-rollover-per-year rule separately to each IRA
• Attempting to roll over a required minimum distribution or hardship distribution
• Failing to confirm that the receiving plan accepts the rollover
• Combining pretax, after-tax, and Roth funds without understanding the tax reporting

Before Moving Your Retirement Money

Before initiating a retirement plan or IRA rollover, gather your latest account statements and ask the current and receiving custodians these questions:

• Is the distribution eligible for rollover treatment?
• Can the transfer be completed directly?
• Will any federal or state tax be withheld?
• Does the receiving plan accept this type of contribution?
• Are there pretax, after-tax, or Roth amounts that require separate handling?
• What tax forms will be issued, and how should the rollover be reported?

A few minutes of planning can help prevent delays, excess contributions, and avoidable taxes.

Frequently Asked Questions About Retirement Rollovers

Do I pay taxes when I roll over a retirement account?

A properly completed rollover generally is not taxable at the time of the transfer, although special situations can change the result. For example, moving pretax funds to a Roth account may create taxable income. Tax reporting may still be required even when the rollover itself is not taxable.

Can I roll over only part of a distribution?

Yes. You can generally roll over all or part of an eligible distribution. Any taxable amount you keep is generally included in income and may also be subject to the 10% additional tax on early distributions unless an exception applies.

Does the one-rollover-per-year rule apply to direct IRA transfers?

No. Trustee-to-trustee IRA transfers are not subject to the IRA one-rollover-per-year limit because the IRS does not treat them as rollovers for this purpose.

What happens if I miss the 60-day deadline?

The distribution may become taxable, and additional tax may apply. The IRS may waive the deadline in certain circumstances. Because the relief rules are fact-specific, seek advice promptly if a deadline has been missed.

Does a new employer's plan have to accept my rollover?

No. A retirement plan is not required to accept rollover contributions. Ask the new plan administrator whether rollovers are allowed and which contribution types the plan accepts.

Get Help Before You Move the Money

Retirement rollovers can look simple, but the tax consequences often depend on the account type, how the payment is issued, the timing, and whether the funds include pretax, after-tax, or Roth amounts.

Kamish & Associates can help you review the tax considerations, identify questions to ask your plan administrator or custodian, and understand the reporting after a rollover. Contact our team before initiating a distribution so you can move forward with clarity.

*IMPORTANT: This article is for general educational purposes only and is not tax, legal, or investment advice. Retirement plan rules are complex and individual circumstances vary. Consult a qualified professional before acting. *