The IRA rollover is an important tool, whether you're consolidating accounts or transferring savings from a 401(k) or other retirement plan. It can even be used to give yourself a short-term loan. Plan ahead and monitor the rollover process carefully, though, as incorrect rollovers can incur serious financial penalties from the IRS.
Sixty-Day Rule Basics
The IRS allows you to transfer your retirement savings between IRA accounts and between IRAs and similar, employer-sponsored retirement plans like a 401(k). To prevent abuse, you must complete the transfer within 60 days of the initial withdrawal or the money is deemed distributed. The account is essentially declared null and void, and you are responsible for all taxes and, if applicable, a 10 percent early distribution penalty on the value of the withdrawal. The 60-day count starts on the date of withdrawal -- day 1.
Typically, the term "rollover" is used for a transfer between an IRA and an employer-sponsored qualified retirement plan, but the 60-day rule applies to all IRA-related transfers. This includes transfers between custodians, consolidation of IRA accounts, traditional-to-Roth IRA conversions and Roth-to-traditional deconversions. It counts the same if you move the money yourself or have your custodians complete a trustee-to-trustee transfer on your behalf.
If you have your IRA custodians complete a trustee-to-trustee transfer of same-type IRA funds -- for example, the consolidation of two traditional IRA accounts where you personally never touch the money or assets -- you do not need to report anything on your taxes. You do need to report all other transfers and rollovers. Fill out your Form 1040 as instructed in IRS Publication 590 for your specific type of transfer or rollover.
Exceptions to 60-Day Rule
The IRS recognizes that some things are outside your control, and that these things may prevent the prompt completion of your rollover. You will not be penalized if your financial institution makes a mistake or if there is a delay in deposit to your account, as long as the funds arrived on time and you followed all institutional procedures. You can also avoid a penalty if you deposit the full amount into a qualified retirement plan, such as a 401(k), within one year of the withdrawal date. In addition, you may qualify for a penalty waiver if you are prevented from completing the deposit due to an unexpected hardship, such as a hospitalization. Follow the instructions in IRS Publication 590 to request a hardship waiver.
Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.