There are over $500 billion in IRA rollovers each year. A rollover from a 401(k) plan is the most popular way to fund an IRA. Because the IRA income limitations for 2023 are quite low, $6,500 or $7,500 if age 50 or older, a rollover is the prime way one can boost his or her IRA value. This article will explore the various ways one can rollover funds from a 401(k), 403(b), or 457(b) plan to an IRA.
- Just about any pretax retirement plan can be rolled over into an IRA
- When funds are moved from one IRA to another IRA, that is called a transfer
- Rollovers can be direct or indirect, giving one access to retirement funds to use personally for up to 60 days
IRA to IRA Rollover
A rollover of IRA funds to another IRA is actually referred to as a transfer. It’s the same concept as a rollover, except transfers occur between “like” accounts, such as IRA to IRA or 401(k) to 401(k). Essentially, all you need to do is inform your current IRA custodian that you would like to transfer funds to a new custodian. There are many reasons you might want to do this, but usually, it’s because of investment options. For example, if you would like to invest in alternative investments, such as real estate, you might need to transfer IRA funds to a Self-Directed IRA custodian.
Direct transfers occur when the funds move “directly” from one IRA custodian to another. Transfers can include cash or “in-kind” assets. The latter is when you move non-cash property, such as stocks. These types of transfers can be executed whenever you wish and there’s no limit to the number you pay to perform. Lastly, since you are just moving funds from one plan to another, there are no tax consequences.
Direct Rollover from a 401(k),403(b), or 457(b) Plan to an IRA
A direct rollover is when retirement funds are moved directly from a non-IRA retirement account, such as a 401(k) plan, to an IRA. For practical purposes, there is really no difference between a transfer and a direct rollover. However, the proper terminology of moving a 401(k) plan or other non-IRA funds to an IRA is referred to as a direct rollover.
A direct rollover from a retirement plan to an IRA is tax-free. Direct rollovers to an IRA can be done an unlimited number of times. Like an IRA transfer, a direct rollover can consist of cash or an in-kind asset, such as real estate, stocks, and even cryptos.
Indirect Rollover from a 401(k),403(b), or 457(b) Plan to an IRA
An indirect rollover occurs when the retirement account is rolled over to the retirement account holder first before the funds are ultimately rolled into an IRA. The retirement account owner would have sixty (60) days to re-contribute the funds to an IRA or other retirement plan. An indirect rollover can only be done once every twelve (12) months for all your IRAs. So long as the funds are coming from an IRA or qualified retirement plan, such as an IRA, 401(k), 403(b), 457(b), defined benefit plan, etc., the rollover can be done. It’s important to keep in mind that when you engage in an indirect rollover, there will be a 20% withholding tax.
An indirect rollover allows the retirement account owner to gain tax- and penalty-free access to the rolled over retirement funds for the 60-day period. This gives you temporary access to those retirement funds to use personally. Essentially, it’s a loan that must be paid back into your retirement plan. Failure to re-contribute those funds before the time-frame is up will result in a taxable distribution. Plus, if you are under age 59 1/2, you would be subject to a 10% early distribution penalty. Indirect rollovers should only be considered if you absolutely need those funds, and you have the ability to re-contribute within 60 days.
Triggering Event Rules
In the case of an IRA to IRA transfer, there are no limitations of when it can be done. However, in the case of a 401(k), 403(b), or 457(b), the plan rules impose certain requirements on when a plan participant can gain access to the plan funds to engage in a rollover.
In order for a plan participant to perform a rollover, one usually needs to satisfy a plan triggering event. The most common types of triggering events are:
- You are over the age of 59 1/2
- You are separated from your job
- The plan is terminated
Without a triggering event, you do not have access to those retirement funds and thus, cannot perform a rollover to an IRA.
Rollovers are the best way to increase your IRA balance. They’re most often used when one leaves a job and is looking to take retirement funds with him or her. Rather than being stuck with limited options, it’s generally best to move them to an IRA, where you get to choose the type of investments you wish to make.
Plus, if you need access to those funds for a limited time, you may choose to perform an indirect rollover or transfer; just make sure those funds are contributed to a plan within the 60-day time period or face taxes and possible penalties.