Depending on your circumstances, you may qualify to take a distribution from a retirement plan at work, such as a 401k plan or 403b plan, and roll it into an individual retirement account. You may consider rolling money from an employer-sponsored retirement plan to an IRA if you do not like your investment options, or if you have a new employer.
Qualifying Removals from Retirement Plans
Before you can remove money from your employer's retirement plan, such as a 401k or 403b plan, you have to qualify for a withdrawal that is eligible to be rolled over. Such circumstances are limited to you leaving your company, being permanently disabled, or being over 59 1/2 years old. Although you can also take hardship distributions from your employer plan before age 59 1/2 years old, hardship distributions cannot be rolled into an IRA.
A rollover begins when you remove the money from your retirement plan. From the time you receive the money, you have 60 days to put the money into your IRA. Failing to redeposit the money within 60 days results in losing the tax-deferred status and paying a penalty if you are under 59 1/2. If you have concerns about depositing the money in time, use a transfer, rather than a rollover, because instead of paying the money to you, your retirement plan simply pays the money directly into your IRA.
Taxes on Rollovers
If you roll the money to a traditional IRA, you do not pay any income taxes or penalties as long as you complete the rollover. This is because a traditional IRA is another pretax account. However, if you roll the money into a Roth IRA, which is an after-tax account, you have to count the rollover amount as taxable income for the year. However, since you pay taxes on the rollover, you can take qualified distributions tax free.
When you complete a rollover, you must file Form 1040 or Form 1040A with the IRS. If you rollover funds from your retirement plan to another tax-deferred IRA, you have to report the amount as a nontaxable pension and annuity distribution on your income taxes, even if you incur no additional tax liability. If you roll the money into a Roth IRA, you have to report the entire amount as a nontaxable pension and annuity distribution. You will need to complete Form 8606 to document the taxable portion, and report that amount as a taxable pension and annuity withdrawal.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."