On a Roll to Retirement

If you have money or assets saved in an eligible retirement plan, you may be able to transfer the funds to a different retirement plan without having to pay taxes on the withdrawal, as long as you perform a rollover. In order to be considered a rollover, the transfer has to happen within sixty days, and although it isn’t taxed, the distribution will be shown on your tax return. Not every distribution is eligible for a rollover. Some examples of non-eligible distributions include:

  • Post-tax contributions to retirement plans. There are some exceptions to this rule which may allow certain non-taxed distributions to be eligible, so as your financial planner for assistance in determining if your distributions fit the exception.
  • Distributions that are a portion of a life-time payment to you or a beneficiary, or any distributions which will be made over a period of ten years or more.
  • Distributions made as part of a required minimum statement
  • Hardship distributions
  • Dividends from employer securities
  • Life insurance coverage expenses

As with most rules, there are exclusions and fine print that relates to certain corrective distributions and loans. Any distributions that are not rolled over into a new plan have to be accounted for in your income for the year.

There is a time-sensitive period for which you can roll an eligible distribution into another plan. The sixty day rollover period applies from the day you received the eligible distribution. If your benefit came from an employer sponsored plan, regardless of whether or not you chose to roll it over into a new plan, it will be subject to 20% income tax. However, you can chose to defer that tax, but you will need to add the same amount you withheld from an additional source. You can also opt to have the payer automatically roll your funds into a new account directly, and avoid the mandatory taxation altogether.

Retirement distributions to those under the age of 59 ½ are subject to 10% additional tax. This penalty is applicable unless a specific exemption suits the taxpayer. There are some plans, like a SIMPLE IRA in which the distribution may be subject to a 25% penalty tax.