An IRA Rollover Quiz

An IRA Rollover Quiz

Most people think it is easy to move their retirement assets. But is it? The following is a quick quiz. How many of these rollover questions can you get correct? The answers are at the end of the quiz.

1. You are moving funds out of your employer plan to your IRA. The funds are going directly to your IRA. Is this a rollover?
    

2. You are moving funds out of your employer plan to your IRA. The check from the plan will be payable to you. You will then deposit the funds in your IRA. Is this a rollover?
    

3. You are moving your IRA funds from one company directly to another company. Is this a rollover?
    

4. You are moving your IRA funds (IRA, SEP, SIMPLE, or Roth) from one company to another company. You will be receiving a check payable to you which you will then send to the new company. Is this a rollover?
    

5. You just inherited an IRA from a sibling and want to move the funds to a company in your state. You receive a check payable to you which you plan to give to the new company. Is this a rollover?

Bonus Question:

You just inherited an employer plan from a sibling. You were named on the beneficiary form. You want to move the funds to an inherited IRA. You receive a check payable to the inherited IRA. Is this a rollover?

Answers:

1. Yes. Under the tax code, all distributions from employer plans are rollovers. In this case, you have a direct rollover. It will be reported to the plan participant and IRS on a Form 1099-R.
    

2. Yes. Under the tax code, all distributions from employer plans are rollovers. In this case, you have an indirect rollover. There will be mandatory 20% withholding on pre-tax amounts distributed. The plan participant will have 60 days from the receipt of the net amount to redeposit the total amount distributed (the amount of the check + the amount of the withholding) in another retirement account. The total distribution will be reported to the plan participant and the IRS on a Form 1099-R. Any pre-tax funds not timely redeposited will be subject to income tax and the 10% early distribution penalty, if applicable.
    

3. No. In the IRA world this is a direct transfer (trustee-to-trustee transfer). It is a non-taxable and non-reportable transaction.
    

4. Yes. This is a 60-day IRA rollover. Unlike the employer plan distribution, there is no 20% mandatory withholding. The IRA owner has 60 days from the receipt of the funds to redeposit them in another IRA. The IRA owner can only do one such transaction every fiscal year (12 months). The distributing company will send a 1099-R and the receiving company a Form 5498 to both the IRA owner and IRS. Any pre-tax funds not timely redeposited will be subject to income tax and the 10% early distribution penalty, if applicable.
    

5. No. A non-spouse beneficiary can never do a 60-day rollover. Any distribution that is payable to the beneficiary is taxable. There is no remedy for this error. The inherited funds can only be moved as a direct transfer.

Bonus Answer:

Yes. I know, we just said you can’t do that (remember all distributions from an employer plan are a rollover). But Congress has made an exception for inherited employer plans when the non-spouse beneficiary inherits the funds directly, not through the estate. These inherited employer plan funds can be moved as a direct rollover to a properly titled inherited IRA.

All of these questions describe situations that we see fairly regularly. The term rollover tends to be used to describe any movement of retirement funds. The rules are slightly different for distributions from employer plans than for distributions from IRAs. It is important to know all the details of a transaction before giving advice or deciding to move retirement funds.