Are Rollovers Taxable?

Understanding the tax implications

Depending on which option you choose and how you move the assets, some rollovers are taxable. As you can see from the table below, transfers and direct rollovers are tax-free. However, if you’re not careful with an indirect rollover, you could be hit with not only a high income tax, but also withholding and penalties!

 

ONE CARELESS MOVE and you could pay as much as 45% in federal and state income tax!
  TRANSFER or DIRECT ROLLOVER INDIRECT ROLLOVER
Federal Income tax NONE Up to 35% on any amount not rolled into an IRA or plan within 60 days
State Income tax NONE Up to 9.5% (depending on the state) on any amount not rolled into an IRA or plan within 60 days
Tax withholding NONE 20% of taxable amount
Tax penalty NONE 10% of federal tax penalty on any amount not rolled over if withdrawals are taken prior to age 59 1/2
Tax reporting requirement NONE
(although direct rollovers generate a Form 1099-R)
You must report a withdrawal as current income if it's not rolled over within 60 days

 

There may be times when an indirect rollover is appropriate, but it’s a good idea to check with your financial and tax advisors before you use this approach.