Rollover From One IRA Into Another
You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.
You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.
Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.
The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.
Example.
You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.
However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax-free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.
Exception. There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution which meets all three of the following requirements.
1. It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.
2.It was not initiated by either the custodial institution or the depositor.
3.It was made because:
1. The custodial institution is insolvent, and
2.The receiver is unable to find a buyer for the institution.
The same property must be rolled over. If property is distributed to you from an IRA and you complete the rollover by contributing property to an IRA, your rollover is tax free only if the property you contribute is the same property that was distributed to you.
Partial rollovers. If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). The amount you keep may be subject to the 10% additional tax on early distributions discussed later under What Acts Result in Penalties or Additional Taxes .
Required distributions. Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.
Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own as discussed earlier under What if You Inherit an IRA .
Not inherited from spouse. If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period.
Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b.
Enter the total amount of the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, was rolled over, enter zero on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Put “Rollover” next to line 15b, Form 1040; line 11b, Form 1040A; or line 16b, Form 1040NR. See the forms' instructions.
If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2011, attach a statement explaining what you did.
Rollover From Employer's Plan Into an IRA
You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):
Employer's qualified pension, profit-sharing or stock bonus plan,
Annuity plan,
Tax-sheltered annuity plan (section 403(b) plan), or
Governmental deferred compensation plan (section 457 plan).
A qualified plan is one that meets the requirements of the Internal Revenue Code.
Eligible rollover distribution. Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.
1. A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions) ).
2.A hardship distribution.
3.Any of a series of substantially equal periodic distributions paid at least once a year over:
1.Your lifetime or life expectancy,
2.The lifetimes or life expectancies of you and your beneficiary, or
3. A period of 10 years or more.
4.Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.
5.A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan.
6.Dividends on employer securities.
7. The cost of life insurance coverage.
Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in your income.
Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution.
Rollover by nonspouse beneficiary. A direct transfer from a deceased employee's qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA.
Written explanation to recipients. Before making an eligible rollover distribution, the administrator of a qualified retirement plan must provide you with a written explanation. It must tell you about all of the following.
Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan.
The requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan.
The tax treatment of any part of the distribution that you roll over to a traditional IRA or another eligible retirement plan within 60 days after you receive the distribution.
Other qualified retirement plan rules, if they apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.
How the plan receiving the distribution differs from the plan making the distribution in its restrictions and tax consequences.
The plan administrator must provide you with this written explanation no earlier than 90 days and no later than 30 days before the distribution is made.
However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met.
You are given at least 30 days after the notice is provided to consider whether you want to elect a direct rollover.
You are given information that clearly states that you have this 30-day period to make the decision.
Contact the plan administrator if you have any questions regarding this information.
Withholding requirement. Generally, if an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. You can avoid withholding by choosing the direct rollover option, discussed later.
Exceptions. The payer does not have to withhold from an eligible rollover distribution paid to you if either of the following conditions apply.
The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.
The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.
The amount withheld is part of the distribution. If you roll over less than the full amount of the distribution, you may have to include in your income the amount you do not roll over. However, you can make up the amount withheld with funds from other sources.
Other withholding rules. The 20% withholding requirement does not apply to distributions that are not eligible rollover distributions. However, other withholding rules apply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a nonperiodic distribution. For either of these types of distributions, you can still choose not to have tax withheld.
Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA. The plan is not required to give you this option if your eligible rollover distributions are expected to total less than $200 for the year.
Withholding. If you choose the direct rollover option, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA.
If any part is paid to you, the payer must withhold 20% of that part's taxable amount.
If you are under age 59½, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over. There is no 10% additional tax. See Early Distributions .
when to report as income Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid. Any taxable part is not income to you until later distributed to you from the IRA.
If you decide to roll over any part of a distribution, the direct rollover option will generally be to your advantage. This is because you will not have 20% withholding or be subject to the 10% additional tax under that option.
If you have a lump-sum distribution and do not plan to roll over any part of it, the distribution may be eligible for special tax treatment that could lower your tax for the distribution year. In that case, you may want to see Publication 575 and Form 4972, Tax on Lump-Sum Distributions, and its instructions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods.
You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over all or part of the distribution. However, if you roll over any part of the lump-sum distribution, you cannot use the Form 4972 special tax treatment for any part of the distribution.
Contributions you made to your employer's plan. You can roll over a distribution of voluntary deductible employee contributions (DECs) you made to your employer's plan. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These are not the same as an employee's elective contributions to a 401(k) plan, which are not deductible by the employee.
If you receive a distribution from your employer's qualified plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distribution.
No waiting period between rollovers. The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year.
IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan, you can roll over part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds will not be eligible for any optional tax treatment for which it might have otherwise qualified.
Property and cash received in a distribution. If you receive both property and cash in an eligible rollover distribution, you can roll over part or all of the property, part or all of the cash, or any combination of the two that you choose.
The same property (or sales proceeds) must be rolled over. If you receive property in an eligible rollover distribution from a qualified retirement plan you cannot keep the property and contribute cash to a traditional IRA in place of the property. You must either roll over the property or sell it and roll over the proceeds, as explained next.
Sale of property received in a distribution from a qualified plan. Instead of rolling over a distribution of property other than cash, you can sell all or part of the property and roll over the amount you receive from the sale (the proceeds) into a traditional IRA. You cannot keep the property and substitute your own funds for property you received.
Example.
You receive a total distribution from your employer's plan consisting of $10,000 cash and $15,000 worth of property. You decide to keep the property. You can roll over to a traditional IRA the $10,000 cash received, but you cannot roll over an additional $15,000 representing the value of the property you choose not to sell.
Treatment of gain or loss. If you sell the distributed property and roll over all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds (including any increase in value) are treated as part of the distribution and are not included in your gross income.
Example.
On September 6, Mike received a lump-sum distribution from his employer's retirement plan of $50,000 in cash and $50,000 in stock. The stock was not stock of his employer. On September 24, he sold the stock for $60,000. On October 6, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). Mike does not include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into a traditional IRA.
Note.
Special rules may apply to distributions of employer securities. For more information, see Publication 575.
Partial rollover. If you received both cash and property, or just property, but did not roll over the entire distribution, see Rollovers in Publication 575.
Life insurance contract. You cannot roll over a life insurance contract from a qualified plan into a traditional IRA.
Distributions received by a surviving spouse. If you receive an eligible rollover distribution (defined earlier) from your deceased spouse's eligible retirement plan (defined earlier), you can roll over part or all of it into a traditional IRA. You can also roll over all or any part of a distribution of deductible employee contributions (DECs).
Distributions under divorce or similar proceedings (alternate payees). If you are the spouse or former spouse of an employee and you receive a distribution from a qualified retirement plan as a result of divorce or similar proceedings, you may be able to roll over all or part of it into a traditional IRA. To qualify, the distribution must be:
One that would have been an eligible rollover distribution (defined earlier) if it had been made to the employee, and
Made under a qualified domestic relations order.
Qualified domestic relations order. A domestic relations order is a judgment, decree, or order (including approval of a property settlement agreement) that is issued under the domestic relations law of a state. A “qualified domestic relations order” gives to an alternate payee (a spouse, former spouse, child, or dependent of a participant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it cannot alter the amount or form of the benefits of the plan.
Tax treatment if all of an eligible distribution is not rolled over. Any part of an eligible rollover distribution that you keep is taxable in the year you receive it. If you do not roll over any of it, special rules for lump-sum distributions may apply. See Publication 575. The 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes , does not apply.
Keogh plans and rollovers. If you are self-employed, you are generally treated as an employee for rollover purposes. Consequently, if you receive an eligible rollover distribution from a Keogh plan (a qualified plan with at least one self-employed participant), you can roll over all or part of the distribution (including a lump-sum distribution) into a traditional IRA. For information on lump-sum distributions, see Publication 575.
More information. For more information about Keogh plans, see Publication 560.
Distribution from a tax-sheltered annuity. If you receive an eligible rollover distribution from a tax-sheltered annuity plan (section 403(b) plan), you can roll it over into a traditional IRA.
Receipt of property other than money. If you receive property other than money, you can sell the property and roll over the proceeds as discussed earlier.
Rollover from bond purchase plan. If you redeem retirement bonds that were distributed to you under a qualified bond purchase plan, you can roll over tax free into a traditional IRA the part of the amount you receive that is more than your basis in the retirement bonds.
Reporting rollovers from employer plans. Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, enter "Rollover" next to line 16b on Form 1040; line 12b of Form 1040A; or line 17b of Form 1040NR.
Rollover of Exxon Valdez Settlement Income
If you are a qualified taxpayer and you received qualified settlement income, you can contribute all or part of the amount received to an eligible retirement plan which includes a traditional IRA. The amount contributed cannot exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your return, not including extensions.
Qualified settlement income that you contribute to a traditional IRA will be treated as having been rolled over in a direct trustee-to-trustee transfer within 60 days of the distribution. The amount contributed is not included in your income at the time of the contributions and is not considered to be investment in the contract. Also, the 1-year waiting period between rollovers does not apply.
Qualified taxpayer. You are a qualified taxpayer if you are:
A plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska), or
The beneficiary of the estate of a plaintiff who acquired the right to receive qualified settlement income and who is the spouse or immediate relative of that plaintiff.
Qualified settlement income. Qualified settlement income is any interest and punitive damage awards which are:
Otherwise includible in income, and
Received in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska) (whether pre- or post-judgment and whether related to a settlement or judgment).
Qualified settlement income can be received as periodic payments or as a lump sum. See Publication 525, Taxable and Nontaxable Income, for information on how to report qualified settlement income.