Your Guide to Rolling over Your IRA

"Rollover" is a generic term for many transfers between retirement accounts of the same type or between different types of retirement plans. Some of these transfers are relatively simple; you just complete some paperwork and let the trustee handle the details. Other rollovers have significant tax implications, and you need to be certain that these rollovers are reported correctly and that the taxes are paid, often with significant pentlities, so it’s important to plan and execute a rollover correctly.

Traditional to Roth

Rolling your traditional IRA into a Roth account can have significant tax benefits, because all Roth IRA withdrawals in retirement are tax-free. The younger you are, the bigger the advantage to rolling over a traditional IRA to a Roth, as the money will have more time to grow tax-free before you retire.

However, because your traditional IRA contributions probably were made before taxes -- you claimed a deduction for them -- you need to pay taxes on the money when you roll it over into a Roth.

401(k) to IRA

If you leave employment with a company that provided you with a 401(k) plan, you can roll that account over into your new company's 401(k) plan. But you might be better off rolling the 401(k) over into an IRA.

Rolling a 401(k) into a traditional IRA is simple; you simply open an IRA account to receive the funds. The IRA trustee can handle all of the paperwork, and this rollover has no tax consequences.

You can also roll over a 401(k) into a Roth IRA by paying any taxes due on the funds that you convert.

Trustee to Trustee

You can roll over an IRA from one trustee to another at any time. This also applies to your 401(k)plan with a previous employer.  If you have left money with a previous employer and your new employer has a 401 (k) or similar plan, by all means rollover your retirement dollars. Remember the more you have in one place, the faster your money returns more returns from compounding of the interest, dividends and capital gains in your retirement accounts.

If you are unhappy with the service or investment choices from your current IRA provider, a trustee to trustee transfer might be a good option.

The trustee receiving the funds will usually complete all of the necessary paperwork. And with a trustee-to-trustee rollover, you will have no tax consequences as long as the two accounts are of the same type.

Tax-Free IRA 60-Day Rollover

You can complete an IRA rollover between two IRA accounts without involving another trustee by requesting a disbursement of funds from the account. The trustee will give you the funds directly. You will have up to 60 days to deposit this money into another IRA account of the same type, or back into the IRA you withdrew the funds from.

If you do not complete the rollover by making this deposit on time, the IRS treats the money as a distribution, and it is subject to any taxes and penalties that apply.

You have the same option to roll over funds from a 401(k) or other employer-sponsored plan if you leave the company offering the plan. However, the trustee would withhold 20 percent of the amount you withdraw, to apply toward any taxes and penalties that might be due. To complete this rollover tax-free, you'd need to come up with money from other sources to redeposit these withheld funds. If you don't, the withheld money will be considered an early distribution. Many investors use a trustee-to-trustee transfer to avoid tax withholding when rolling over from an employer plan.

Taxes

Any time you roll over a before-tax retirement account such as a traditional IRA or 401(k) to a Roth IRA, you must pay your normal income tax rate on the amount of money you rolled over. The amount of the rollover is added to your income for the year, and this might place you in a higher tax bracket, increasing the amount of taxes you pay.

Form 1099-R

With any IRA rollover, you will receive a Form 1099-R detailing the transaction and showing the amount rolled over as a distribution. If the rollover is tax-free, the form should show the taxable distribution amount as zero. You still must report this distribution, and show the taxable amount of zero on your income tax return.