2 rollovers within 12 months
If a client chooses to rollover his lump sum retirement/pension benefit into his company’s 401k, may he later complete a direct rollover of the entire 401k into an IRA? Does the answer change if both rollovers are accomplished within the same 12 month period?
Permalink Submitted by Alan Spross on Thu, 2011-05-05 23:41
Any rollover that has a qualified plan (eg 401k) on either end of the rollover does NOT count with respect to the one rollover limitation per IRA account. The limit only applies to IRA to IRA rollovers.
Permalink Submitted by Walter Bond on Fri, 2011-05-06 14:59
The correct nomenclature for an IRA to IRA “rollover” is “transfer,” right? A client may complete as many “transfers” as he/she wants without limitation, right?
The company’s form we are helping our client complete at this time deems the movement of money from the Lump Sum Retirement/Pension Plan to the company’s 401k plan as a “direct rollover.” Consequently, it prompted me to ask the question, can the client then complete a “direct rollover” from the company 401k plan to his IRA within the same 12 month period. Maybe my confusion is due in part to the incorrect label of the first movement of money as a “direct rollover”???
Permalink Submitted by Jose Morales on Fri, 2011-05-06 15:47
[quote=”[email protected]“]The correct nomenclature for an IRA to IRA “rollover” is “transfer,” right? A client may complete as many “transfers” as he/she wants without limitation, right?
The company’s form we are helping our client complete at this time deems the movement of money from the Lump Sum Retirement/Pension Plan to the company’s 401k plan as a “direct rollover.” Consequently, it prompted me to ask the question, can the client then complete a “direct rollover” from the company 401k plan to his IRA within the same 12 month period. Maybe my confusion is due in part to the incorrect label of the first movement of money as a “direct rollover”???[/quote]
No, it is correctly labeled. When funds are moved from an employer sponsored retirement plan to an IRA it can be done as either a Direct or Indirect rollover. If done as a Direct Rollover it does not count against the 1 allowable rollover per year for those funds.
When moving funds between two IRA accounts of the same type it can be done as either a Rollover or a Transfer. There is no such thing as a Direct Rollover when moving funds between two IRAs of the same type (no matter what the rep I spoke to at Charles Schwab last week says…).
When moving funds from an IRA to an employer sponsored plan you can move the funds either by a Direct or Indirect Rollover. The difference is really in whether or not you inform the plan administrator of the funds coming to their plan, and providing appropriate paperwork to the IRA custodian to inform them that the funds are to go directly to an employer sponsored plan. This usually results in a check made payable to the employer sponsored plan, for the benefit of the individual. Do not rely on check titling as the determining factor as to whether a transaction is a Direct Rollover or not (the same applies to Transfers).
Permalink Submitted by Walter Bond on Fri, 2011-05-06 15:58
Thanks. That clears it up for me.
In what case (or which common situation) would you accomplish a “rollover” from one IRA to another? In our office, we are careful to request and try to accomplish only “transfers” from one IRA to another same-titled IRA to avoid any confusion. Additionally, as a practical matter, custodians do not typically issue tax forms following a properly completed transfer.
Permalink Submitted by Alan Spross on Fri, 2011-05-06 16:22
Situations calling for an indirect 60 day IRA to IRA rollover:
1) Taxpayer requires temporary use of the funds
2) IRA custodian does not offer direct transfers – note that under the tax code only qualified plans are REQUIRED to offer direct rollovers (physical transfers). IRA custodians are not, although that makes them uncompetitive if they do not, therefore the vast majority do offer direct transfers.
Re “direct rollover” term used by qualified plans – this is a hybrid term reflecting that the transaction is physically a direct transfer, ie check is made out to new custodian FBO taxpayer, but it must be reported like a rollover, ie a 1099R must be issued and the rollover reported on Form 1040. It also avoids mandatory 20% withholding.
Permalink Submitted by Jose Morales on Fri, 2011-05-06 17:19
[quote=”[email protected]“]Thanks. That clears it up for me.
In what case (or which common situation) would you accomplish a “rollover” from one IRA to another? In our office, we are careful to request and try to accomplish only “transfers” from one IRA to another same-titled IRA to avoid any confusion. Additionally, as a practical matter, custodians do not typically issue tax forms following a properly completed transfer.[/quote]
A rollover occurs after a client has taken a distribution from an IRA. IRA custodians generally consider any request to withdraw funds from an IRA as a distribution. However, we always have clients approach us wanting a check and informing us that we are not allowed to report the withdrawl because they have told us they will do a “direct rollover” to another IRA. Sometimes they will ask for the check to be made payable to the other financial institution if they know where they are going to redeposit the funds. Although it is commonly held that a check made payable to an IRA custodian, for the benefit of an individual and given to the individual to deliver themselves is not considered “constructive receipt” of the funds I would advise against this method of accomplishing a non-reportable IRA to IRA transfer. You are really putting yourself at the mercy of front line staff who most likely have very little IRA knowledge when you ask for a check yourself. It is much safter to have the IRA custodian where funds are to be received send the current IRA custodian a transfer request.