IRS Regulations for an IRA Rollover

Chances are pretty good that you’ll want to move money from one IRA or other retirement account to another IRA at some point. For example, you might decide that moving retirement account funds into a Roth IRA from a 401(k) or traditional IRA will give you a better deal in the long run. A rollover is the Internal Revenue Service term for one method of moving money from one retirement account to another, and it's governed by a number of regulations.

Definition

The IRS defines a rollover as a method of moving funds from one retirement account to another by withdrawing the money from one account, then depositing the funds into another account -- in this case, a traditional or Roth IRA. Alternatively, you also can move funds to an IRA by asking the trustee of the existing account to send the funds directly to the trustee of the new account via a trustee-to-trustee transfer instead of a rollover.

Rollover Rules

When you roll over money from a 401(k), traditional IRA or other tax-deferred retirement account into a traditional IRA, there are no tax consequences as long as you carry out the rollover properly. This also applies to a rollover from one Roth IRA to another Roth IRA. You must deposit all of the funds into the new account within 60 days of taking them out of the original account. If you miss the 60-day deadline, it is considered an early distribution of funds, which means you must pay income taxes on the withdrawn funds, and you may be assessed a 10 percent penalty tax as well.

Conversions

When you roll over funds from a 401(k), traditional IRA or other tax-deferred account into a Roth IRA, the rollover is called a conversion. Funds in tax-deferred accounts are pre-tax money, meaning you will have a tax liability when the money is withdrawn. Funds in a Roth IRA are after-tax money. For this reason, you have to pay regular income tax when you roll tax-deferred retirement savings into a Roth IRA. There is one exception to this rule: If you have made non-deductible contributions to a tax-deferred retirement account, those funds aren’t taxable because you did not get a tax deduction for them.

Avoiding Penalties

All of the money you take out of the original account for a rollover is supposed to be deposited in the new account. If you hold out any funds to pay the income taxes on the converted money, you will be charged the 10 percent penalty tax. To avoid this expense, use money from a regular savings account or similar source to pay the taxes. Alternatively, you can use nondeductible contributions made to the original account or withdraw contributions previously made to the Roth IRA. However, if you do this, you can continue to make contributions to the Roth IRA up to the annual $5,000 limit, but you may not add any extra to make up for the contributions you withdrew.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.