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.