If you’re eligible to receive a taxable distribution from an employer-sponsored retirement plan [like a 401(k)], you can avoid current taxation by instructing your employer to roll the distribution directly over to another employer plan or IRA. With a direct rollover, you never actually receive the funds.
You can also avoid current taxation by actually receiving the distribution from the plan and then rolling it over to another employer plan or IRA within 60 days following receipt. This is called a “60-day” or “indirect” rollover.
But if you choose to receive the funds rather than making a direct rollover, your plan is required to withhold 20% of the taxable portion of your distribution (you’ll get credit for the amount withheld when you file your federal tax return). This is true even if you intend to make a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to make up the 20% that was withheld using other assets.
For example, if your taxable distribution from the plan is $10,000, the plan will withhold $2,000 and you’ll receive a check for $8,000. You can still roll $10,000 over to an IRA or another employer plan, but you’ll need to come up with that $2,000 from your other funds.
Similarly, if you’re eligible to receive a taxable distribution from an IRA, you can avoid current taxation by either transferring the funds directly to another IRA or to an employer plan that accepts rollovers (sometimes called a “trustee-to-trustee transfer”), or by taking the distribution and making a 60-day indirect rollover (20% withholding doesn’t apply to IRA distributions).
Under recently revised IRS rules, you can make only one tax-free, 60-day, rollover from any IRA you own (traditional or Roth) to any other IRA you own in any 12-month period. However, this limit does not apply to direct rollovers or trustee-to-trustee transfers.
Because of the 20% withholding rule, the one-rollover-per-year rule, and the possibility of missing the 60-day deadline, in almost all cases you’re better off making a direct rollover to move your retirement plan funds from one account to another.
About 360 Financial Group
360 Financial Group, founded in 1990, provides a holistic approach to comprehensive wealth management as well as tax and accounting and investment management services. At 360 Financial Group, our MISSION is to be our clients’ primary advisor. We believe our knowledge, experience, and intuitive approach to tax and financial planning gives our clients the confidence they need to help them realize their dreams.
Registered Representative, Securities Offered Through Cambridge Investment Research. Inc., a Registered Broker-Dealer, Member FINRA, SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Small Business Group, Inc. and Cambridge are not affiliated.
About Cambridge
Cambridge Investment Group, Inc. is a privately-controlled firm with a national reach across the financial services industry consisting of multiple broker-dealers and RIAs, including Cambridge Investment Research Advisors, Inc. – a large corporate RIA; and Continuity Partners Group, LLC – a special purpose broker-dealer and registered investment advisor; and Cambridge Investment Research, Inc. – an independent broker-dealer, member FINRA/SIPC, that is among the largest privately-controlled independent broker-dealers in the country supporting approximately 3,000 independent financial professionals nationwide who serve their clients as registered representatives and investment advisor representatives, choosing to use either Cambridge’s firm Registered Investment Adviser or their own. For more information visit www.joincambridge.com.
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.
