Do You Really Know What a Rollover Is?

By Beverly DeVeny, IRA Technical Expert
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Everyone thinks they know what a rollover is, but do they really? A rollover is when you move retirement funds from one account to another. Well, that is partially right.

In the employer plan world, all distributions are “rollovers.” That is what they are called in the tax code. You have two types of rollovers.

1. Direct rollover: The plan participant does not touch the funds. They go directly from the employer plan to another retirement plan.
2. Indirect rollover: The check from the plan is payable to the plan participant. They can cash the check, spend the money, or, within 60 days from the receipt of the check, put the funds back into another retirement plan.

In the IRA world, a rollover is a distribution to the IRA or Roth IRA account owner where they can use the funds or assets while they are outside of the IRA. The account owner has 60 days from the receipt of the distribution to replace it in the same or another retirement account. Funds that go from an IRA to a Roth IRA in a Roth conversion are treated as a rollover for income tax purposes. When an IRA or Roth IRA owner has the funds or assets directly transferred to another IRA or Roth IRA it is NOT a rollover. That is a transfer.

It’s important to note that not all distributions are eligible for rollover.  The only IRA or plan assets that can be rolled over are those that qualify under what the tax law defines as “eligible rollover distributions” (ERDs). The law does not state what an ERD is, but rather what is not.

ERDs are any distributions from company plans or IRAs except for:

1. Required minimum distributions
2. Section 72(t) payments
3. Hardship distributions (from plans only, there are no hardship distributions from IRAs)
4. Distributions made payable to non-spouse IRA or plan beneficiaries
5. Corrective distributions of excess contributions or excess deferrals
6. Deemed distributions (defaulted plan participant loans)
7. Dividends on employer securities
8. Any distribution made from the same IRA or Roth IRA in which a rollover has already occurred within the last 12 months (either a distribution from or a rollover into the account), For this purpose, IRAs and Roth IRAs are combined. For example, if you have an IRA and a Roth IRA, you can do only one rollover in any 12-month period. You cannot do a rollover of IRA funds and a rollover of Roth IRA funds within the same 12 months. Your second distribution would not be eligible to be rolled over to another retirement account. It will become a distribution to you, subject to any applicable taxes and penalties.
    

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