Can Part of a Cash Disbursement Be Rolled Over Into an IRA?

One of the benefits of rolling part of your cash distribution to an IRA is that you won't have to pay taxes on that money. For any portion of your distribution you decide to keep as cash, you will have to pay ordinary income tax. Additionally, employers are required to withhold 20 percent of the cash portion of your distribution, so you will only end up receiving 80 percent of what you withdraw in cash. If you are in a high tax bracket, you may still owe additional taxes when you file your tax return.

If you take a cash distribution from your IRA after age 59 1/2, you don't have to worry about any early distribution penalties. However, if you are younger than 59 1/2, you will face a 10 percent penalty tax on the amount you take as a cash distribution. You can avoid the 10 percent penalty on the portion you roll over to an IRA.

One way to perform a rollover is to have your employer send you a check for the full amount of your distribution. From there, it is your responsibility to determine which portion you want to keep as a cash disbursement and how much you want to roll over into your IRA. The danger with this method is that you only have 60 days to roll over your funds to an IRA. Take any longer, and the IRS will consider your rollover a distribution, subject to tax and possible penalties. You can avoid this problem by asking your employer to perform a direct rollover to the trustee of your IRA.

Just because you no longer work for your employer doesn't mean you have to cash out or roll over your retirement account. Many employers will let you keep the money in your original retirement plan if you have at least $5,000 in your account. You can still take cash distributions if you want, subject to IRS rules, but you do not have to take the extra step of rolling over part of your money into a separate IRA.