Are There Specific Rules for Rollovers?

From SunAmeria Asset Management Corp.

Yes.  It pays to know the rules.

In addition to the 60-day rollover requirement, you must follow these additional requirements for the rollover to be tax-free:  

 

Rollover from one IRA into another

  • Only one rollover is permitted in a consecutive 12-month period. This rule applies to both direct and indirect rollovers. If an additional rollover is made, the entire distribution would be subject to ordinary income tax. However, transfers between IRAs are not subject to this one-year limit.
  • The same property must be rolled over within 60 days. For example, if you withdraw stock from the IRA, you cannot sell the stock and roll the proceeds into a new IRA; if this is done, then the entire rollover amount is taxable.

 

Rollover from an employer-sponsored plan into an IRA

These special rules apply to rollovers from eligible retirement plans, such as 401(k) and 403(b) plans.

  • No waiting period between rollovers: Unlike IRA-to-IRA rollovers, employees can roll over assets from an eligible retirement plan to an IRA at any time, as long as there is a triggering event, such as separation from service or attainment of age 59½. 
  • Same property (or sales proceeds) rule: With rollovers from an eligible retirement plan, employees can either roll the same property into the IRA or sell the property and invest the proceeds into the IRA. This cannot be done in an IRA-to-IRA rollover. However, for the transaction to be tax-free, you CANNOT keep the stock and contribute additional cash in place of the stock (even though it may be the same dollar value).
  • 20% tax withholding requirement: When assets are distributed in an indirect rollover, the employer generally has to withhold 20% of the taxable amount. You can avoid the withholding requirement by simply electing a direct rollover.
  • 30-day written notice: Before a distribution is made, employers must provide plan participants with a special tax notice explaining the distribution options available to them and how they work, including direct and indirect rollovers and the 20% withholding requirement. Following receipt of the notice, the employee has 30 days to make a rollover decision. The employee may also waive the notice requirement.