7.7 Tax-Free Rollovers From Qualified Plans

A rollover allows you to make a tax-free transfer of a distribution from a qualified retirement plan to another qualified plan that accepts rollovers or to a traditional IRA. A 403(b) plan (7.21), or a state or local government 457 plan (7.22) that accepts rollovers, is treated as a qualified retirement plan. If a rollover is made to a traditional IRA, later distributions received from the IRA are taxable under the IRA rules (8.8).

The rollover rules in this section apply whether you are an employee or are self employed.

Caution for plan participants born before January 2, 1936. If the distribution is for part of your account balance and you roll it over, a later lump-sum distribution from the same plan will not qualify for averaging even if you were born before January 2, 1936 (7.4). If a rollover is made to a traditional IRA and you plan to keep working, the possibility of claiming averaging later from another employer plan may be preserved if the IRA qualifies as a a “conduit IRA”(7.8).

Eligible rollover distributions.

Almost all taxable distributions received from a qualified corporate or self-employed pension, profit-sharing, stock bonus, or annuity plan are eligible for tax-free rollover. Exceptions include substantially equal periodic payments over your lifetime or over a period of at least 10 years, hardship distributions, and minimum distributions (7.13) required after age 70½; see below for the list of ineligible distributions.

Rollover of after-tax contributions.

After-tax contributions may be rolled over to a traditional IRA. A trustee-to-trustee transfer of after-tax contributions may also be made to a qualified defined contribution plan, a defined benefit plan, or a 403(b) tax-sheltered annuity that separately accounts for the after-tax amount.

Rollover options.

If you want to make a tax-free rollover of an eligible rollover distribution, you should instruct your employer to directly roll over the funds to a traditional IRA you designate or to the plan of your new employer. You could also choose to have the distribution paid to you, and within 60 days you could make a tax-free rollover yourself. However, to avoid the 20% mandatory withholding tax, you must elect to have the plan make a direct rollover. If an eligible rollover distribution is paid to you, the 20% withholding tax applies. Before a distribution is made, your plan administrator must provide you with written notice concerning the rollover options and the withholding tax rules. See 7.8 for further details on the direct rollover and personal rollover alternatives.

Planning Reminder

Direct Rollover to Roth IRA

A distribution from a qualified employer plan, 403(b) plan, or governmental 457 plan can be rolled over to a Roth IRA, but the rollover is a taxable distribution except to the extent it is allocable to after-tax contributions. If you rolled over a distribution in 2010, and did not elect on Form 8606 to report the entire taxable amount as 2010 income, half of the taxable amount was reportable as 2011 income and the other half must be reported as 2012 income(8.21).

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Rollover from qualified retirement plan to IRA after age 70½.

Starting with the year you reach age 70½, you may no longer make contributions to a traditional IRA. However, if you are over age 70½ and you receive an eligible rollover distribution from your employer’s plan (including a plan for self-employed participants), you may instruct your plan administrator to make a direct rollover of the distribution to a traditional IRA (7.8). If you receive the distribution from the employer, a 20% tax will be withheld. You may then make a tax-free rollover within 60 days of the distribution; see the discussion of “personal rollovers” (7.8). In the year of the rollover, you must receive a minimum distribution from the IRA (8.13).

Beneficiaries.

See the discussion of rollover options open to beneficiaries (7.8).

Distributions that may not be rolled over.

Any lump-sum or partial distribution from your account is eligible for rollover except for the following:

• Hardship distributions from a 401(k) plan or 403(b) plan (7.19).
• Payments that are part of a series of substantially equal payments made at least annually over a period of 10 years or more or over your life or life expectancy (or the joint lives or joint life and last survivor expectancies of you and your designated beneficiary).
• Minimum required distributions after attaining age 70½ or retiring (7.13).
• Corrective distributions of excess 401(k) plan contributions and deferrals.
• Dividends on employer stock.
• Life insurance coverage costs.
• Loans that are deemed to be taxable distributions because they exceed the limits discussed in 7.16.

For all of the above taxable distributions that are ineligible for rollover, you may elect to completely avoid withholding on Form W-4P.