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IRS Rollover Rules Have Changed For 2015: What You Need to Know

Rollovers are a great way for investors to minimize taxes and investment fees and consolidate their accounts.  For example, say an employee has balances in both their employer’s 401(k) plan and an IRA.  If that employee leaves to work elsewhere, they can transfer the assets from their old 401(k) into the IRA, penalty free.  This often cuts down on expenses they were paying by participating in the 401(k) plan, and also offers more flexibility in the IRA.  They also have fewer accounts to monitor.

There are two ways to execute such a transfer.  The first (and simpler way), is for the employee to fill out a transfer form at the custodian where their IRA is held.  The custodian will then be responsible for the entirety of the transfer, and should complete it in short order.  This is called a trustee to trustee rollover.

The second method is for the employee to request a check from the custodian of the 401(k) plan, made out to himself.  He would then deposit the check into the IRA held at the other custodian.  This is called a non-trustee to trustee rollover.  This deposit must be made within 60 days of receiving the 401(k) distribution.  If it’s not, the IRS views the transaction as a taxable distribution.  This is subject to a 10% penalty if the employee is under age 59 ½. 

Additionally, the deposit into the IRA is considered a normal contribution if it’s done after the 60 day window closes.  This limits the contribution to $5,500 in 2015 (or $6,500 if the employee is 50 or older).  Any deposit over this amount is an excess contribution, and taxed at 6% for each year it remains in the IRA.  The penalty can be avoided though, if it’s withdrawn (along with any income earned on the excess contribution) prior to the due date of the individual’s income tax return.  While a trustee to trustee rollover is more streamlined, some investors still prefer to receive a physical check and deposit it themselves into an IRA. 

Here’s the important part: prior to 2015, investors were free to execute as many rollovers as they wished using either method.  Starting in 2015, investors are limited to one non-trustee to trustee rollover per year.  They may still execute as many trustee to trustee rollovers as they wish.

Offenders will face stiff penalties.  After the first non-trustee to trustee rollover, additional such transfers will be considered taxable distributions – just as if they’d made the deposit after the 60 day window closed.  They are also subject to the same early withdrawal and excess contribution penalties.  The IRS also aggregates individuals’ IRA accounts.  In other words, the new rule applies across all traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. 

The important thing to remember is to always utilize trustee to trustee rollovers.  It’s easier, it’s cleaner, and avoids your risk of being penalized.  If you do find yourself in a position where you must accept a check, make sure it’s made out the new custodian – not to you. 

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Comment   |  4 years, 8 months ago from Lake Oswego, OR