IRA Rollovers

The definition of an individual retirement account (IRA) rollover differs slightly from the way it is defined elsewhere, as, for example, with 401(k) rollovers. A transfer of funds directly between trustees is not considered an IRA rollover, but rather a trustee-to-trustee transfer. A trustee-to-trustee transfer is always tax-free and can be done an unlimited number of times.

A rollover is a distribution to you of cash or other assets from one retirement plan in order to deposit them into another retirement plan. A rollover may occur between IRAs, or between an IRA and an employer's plan. A rollover is tax-free provided the entire rollover contribution is made by the 60th day after you receive a distribution. Any amount not rolled over in time is treated as an early withdrawal and taxable in the year distributed (not after the 60-day period expires).

Tip Distributions from an IRA may generally be rolled over to a qualified plan, 403(b) plan, or 457 government deferred compensation plan. However, such plans are not required to accept rollovers and a plan's provisions must specifically provide for this option.

When rollovers are made between traditional IRAs, there is a one-year waiting period before another rollover of a distribution can be made. The one-year period begins on the date you receive the IRA distribution, not on the date you roll it over. Also, the one-year period applies to each IRA you own.

Example Justin Case established three traditional IRAs, IRA-1, IRA-2 and IRA-3, in three different banks. Justin decides to combine the assets in IRA-1 and IRA-2 into one IRA, IRA-4. On July 31, 2012, he withdraws the amounts in IRA-1 and IRA-2 as part of a rollover. He deposits the amount from IRA-1 into IRA-4 on August 29, 2012 and the amount from IRA-2 on September 21, 2012. Justin cannot make another rollover of assets from IRA-1 or IRA-2 until July 31, 2013. Neither can he rollover the assets deposited from IRA-1 and IRA-2 into IRA-4 into another IRA until July 31, 2013. On September 1, 2012, Justin takes a rollover distribution from IRA-3 that he deposits in IRA-4 on October 31. He cannot make another rollover from IRA-3 until September 1, 2013.

Rollover to Roth IRA.

Anyone can convert amounts in a traditional IRA to a Roth IRA. The conversion is treated as a taxable distribution, but is not subject to the 10-percent early withdrawal penalty.

Tip Prior to 2010, an individual whose adjusted gross income (AGI) exceeded $100,000 for the tax year could not roll over amounts from a traditional IRA to a Roth IRA. For a married couple, amounts from a traditional IRA could be rolled over into a Roth IRA if the couple's AGI did not exceed $100,000 and they filed a joint tax return. A person's AGI was determined before the inclusion in income of any amount as a result of the conversion. Married individuals who filed separately could make qualified rollovers from a traditional IRA to a Roth IRA. The elimination of the $100,000 ceiling should have higher-income taxpayers and their financial advisors salivating. High-income taxpayers with substantial amounts in traditional IRAs previously were shut out of the benefits of conversion. Now, anyone can convert to a Roth IRA. In fact, to encourage conversions, Congress allowed those who made a 2010 conversion to defer having to report and pay the tax on the income in 2010. Instead, they could report the income and split the tax due between 2011 and 2012

Reporting requirements. Any rollovers you make involving a traditional IRA must be reported on your tax return for the year the distribution is made--even if they are tax-free. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b. You report the total amount of the distribution on Form 1040, line 15a. If the total amount was rolled over, then you enter zero on Form 1040, line 15b. However, if the total distribution was not rolled over, you enter the taxable portion of the part that was not rolled over on Form 1040, line 15b.

Inherited IRAs. If you inherit a traditional IRA from a spouse, you can roll it over to your own IRA or rename it as your own IRA. If a traditional IRA is inherited from somebody other than your spouse, you cannot roll it over or allow it to receive rollover contributions from you. Instead, you are required to withdraw and pay tax on the inherited IRA assets.

The eligible retirement plan of a deceased person can be rolled over tax-free into an IRA established to receive the distribution on behalf of a nonspouse beneficiary via trustee-to-trustee transfer. If such a transfer is made:

• the transfer is treated as an eligible rollover distribution,
• the transferee IRA is treated as an inherited account, and
• the required minimum distribution rules applicable where the participant/owner dies before the entire interest is distributed apply to the transferee IRA, except that the special rules for surviving spouse beneficiaries do not apply.

Transfers related to divorce. Just like any other item of property being fought over, a traditional IRA may be transferred between divorcing spouses. The transfer is totally tax-free if it is transferred under a divorce or separate maintenance decree or a written document related to such a decree.

The two commonly used methods to make the transfer are changing the name on the IRA or making a direct transfer of IRA assets to the receiving spouse's IRA. The date of transfer determines when the transferred IRA or IRA assets belong to the receiving spouse.