IRA Rollovers
The definition of an individual retirement account (IRA) rollover differs slightly from the way it is defined elsewhere, as, for example, with 401(k) rollovers. A transfer of funds directly between trustees is not considered an IRA rollover, but rather a trustee-to-trustee transfer. A trustee-to-trustee transfer is always tax-free and can be done an unlimited number of times.
A rollover is a distribution to you of cash or other assets from one retirement plan to another retirement plan. A rollover may occur between IRAs, or between an IRA and an employer's plan. A rollover is tax-free provided the entire rollover contribution is made by the 60th day after you receive a distribution. Any amount not rolled over in time is treated as an early withdrawal and taxable in the year distributed (not after the 60-day period expires).
When rollovers are made between traditional IRAs, there is a one-year waiting period before another rollover of a distribution can be made. The one-year period begins on the date you receive the IRA distribution, not on the date you roll it over. Also, the one-year period applies to each IRA you own.
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Example
Justin Case established three traditional IRAs, IRA-1, IRA-2 and IRA-3, in three different banks. Justin decides to combine the assets in IRA-1 and IRA-2 into one IRA, IRA-4. On July 31, 2006, he withdraws the amounts in IRA-1 and IRA-2 as part of a rollover. He deposits the amount from IRA-1 into IRA-4 on August 29 and the amount from IRA-2 on September 21. Justin cannot make another rollover of the assets distributed from IRA-1 and IRA-2 and rolled over to IRA-4 until July 31, 2007.
On September 1, 2006, Justin takes a rollover distribution from IRA-3 that he deposits in IRA-4 on October 31. He cannot make another rollover of that amount until September 1, 2007.
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Rollover to Roth IRA. An individual whose adjusted gross income (AGI) does not exceed $100,000 for the tax year can roll over amounts from a traditional IRA to a Roth IRA. For a married couple, amounts from a traditional IRA can be rolled over into a Roth IRA if the couple's AGI does not exceed $100,000 and they file a joint tax return. A person's AGI is determined before the inclusion in income of any amount as a result of the conversion. Married individuals who file separately cannot make qualified rollovers from a traditional IRA to a Roth IRA.
Starting in 2010, the Tax Increase Prevention and Reconciliation Act of 2005 eliminates the $100,000 adjusted gross income ceiling for converting a regular IRA to a Roth IRA. A conversion is treated as a taxable distribution, but is not subject to the 10-percent early withdrawal penalty. Taxpayers who convert in 2010 can elect to recognize the conversion income in 2010 or average it over the next two years.
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Tip
The elimination of the $100,000 ceiling should have higher-income taxpayers and their financial advisors salivating. High-income taxpayers with substantial amounts in traditional IRAs previously were shut out of the benefits of conversion. Now, anyone can convert to a Roth IRA starting in 2010.
There are several tax planning opportunities to consider now, though. Although this provision does not extend to 401(k) plans, nothing would prevent Roth IRA conversions of traditional IRAs that have received proceeds of 401(k) balances when an individual leaves employment. Nor does the new law prevent high-income taxpayers from contributing to nondeductible traditional IRAs now in anticipation of converting to Roth IRAs in 2010.
Keep in mind that 2010 is also the last year for the current low income tax rates before they sunset in 2011. The rush to do Roth conversions in 2010 may be historic, especially if Congress does not extend the lower tax rates. So, plan ahead to take full advantage of this change in the law.
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Reporting requirements. Any rollovers you make involving a traditional IRA must be reported on your tax return for the year the distribution is made. Rollovers from a traditional IRA to the same or another traditional IRA are reported on lines 15a and 15b of Form 1040 or on lines 11a and 11b of Form 1040A. To report a rollover from an employer retirement plan to a traditional IRA, use lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A.
Inherited IRAs. If you inherit a traditional IRA from a spouse, you can roll it over to your own IRA or rename it as your own IRA. If a traditional IRA is inherited from somebody other than your spouse, you cannot roll it over or allow it to receive rollover contributions from you. Instead, you are required to withdraw and pay tax on the inherited IRA assets.
Beginning in 2007, the Pension protection Act of 2006 allows a deceased person's eligible retirement plan to be rolled over tax-free into an IRA established to receive the distribution on behalf of a nonspouse beneficiary via trustee-to-trustee transfer. If such a transfer is made: (1) the transfer is treated as an eligible rollover distribution, (2) the transferee IRA is treated as an inherited account, and (3) the required minimum distribution rules applicable where the participant/owner dies before the entire interest is distributed apply to the transferee IRA, except that the special rules for surviving spouse beneficiaries do not apply.
Transfers related to divorce. Just like any other item of property being fought over, a traditional IRA may be transferred between divorcing spouses. The transfer is totally tax-free if it is transferred under a divorce or separate maintenance decree or a written document related to such a decree.
The two commonly used methods to make the transfer are changing the name on the IRA or making a direct transfer of IRA assets to the receiving spouse's IRA. The date of transfer determines when the transferred IRA or IRA assets belong to the receiving spouse.
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