How to Transfer or Rollover Funds to Your IRA?

There are number of options when moving funds from a retirement account to an IRA and the boxes you check can have drastic tax consequences so you’ve got to be careful.  For example, should you move funds from one retirement account to your IRA using a direct rollover, a 60-day rollover, or a trustee-to-trustee transfer. Does 1099-R get issued? Will I have to report anything on my tax return? Let’s go over the options and the consequences as well as the tax reporting for each one.


Direct Rollover from 401(k) to IRA, When Moving from a Company Plan

A direct rollover is generally used when moving funds from an employer plan (e.g. former employer 401(k) or 403(b)) to an IRA). Under a direct rollover, the retirement plan administrator will send the retirement plan funds directly to the new custodian of your IRA. There is no tax consequence and there is no withholding. There is simply a “direct” rollover of the funds to the new IRA account. Most employer plans like 401(k)s and 403(b)s are traditional accounts so those funds are generally rolled to a traditional IRA. If you are moving the funds to a Roth IRA, which is possible, you will need to covert the funds with the IRA custodian as they are being rolled into a Roth IRA. And of course, there are taxes due from the Roth conversion.

There are no limits on the number of Direct Rollovers you may complete, except as may be reasonably imposed by your employer’s retirement plan. Fro example, some employer plans may say that once you no longer work there if you want to move funds that its an all or nothing option (e.g. keep all your funds there or move everything to an IRA).

If you are currently employed with your employer, you are usually only allowed to move funds from the employer’s plan when you have reached retirement plan age under the plan. This is usually 55 or 59 1/2 depending on your employer’s plan.

A direct rollover from an employer plan is not subject to tax or withholding. When a direct rollover is completed, a 1099 is generally issued from the current plan but is marked as not taxable as the funds are being sent to another qualifying retirement account.

60-Day Rollover, Only When You Need it This Way

A 60 day rollover allows you to take a distribution from one IRA and so long as you re-deposit that same amount into another IRA within 60 days the funds are no considered distributed.  When using a 60 day rollover, you receive the funds personally from the current IRA plan custodian and are then required to re-deposit those funds into a qualifying IRA within 60 days. Failure to redeposit in time will cause a distribution of the funds and you will be subject to taxes on any applicable penalties (e.g. early withdrawal penalty if under 59 1/2) for failure to re-deposit in time. There are no extensions and there is no mercy if you miss the 60 days deadline.The new IRA custodian will generally require a certification and your prior IRA account custodian’s statement to verify that the funds were in an IRA within the past 60 days.

It is very important to note that as of 2013 you can only complete one 60-day rollover every twelve months.  See my prior article here on the 12 month rule for 60 day rollovers. Consequently, you should not use the 60-day rollover method option on a regular basis.

When using a 60-day rollover, the former IRA custodian will issue a 1099-R reporting the distribution as taxable and you will need to certify that you re-deposited within 60 days on your personal tax return to avoid the distribution. The 60 day rollover is completed communicated to the IRS on your personal tax return on line 15 where you report the distribution from the 1099-R and then on line 15b you report that it was not taxable, since it was rolled over within 60 days. On line 15b and you indicate that the taxable amount is zero and you write the word Rollover next to line 15b. See the IRS instructions for line 15 here.

Trustee-to-Trustee Transfer, The Best Option When Changing IRA Custodians

The trustee-to-trustee transfer is the preferred method of moving funds form one IRA to another (e.g. from a Roth IRA at Fidelity to a Roth IRA with a self-directed custodian).. Under a trustee-to-trustee transfer the funds are sent from one IRA custodian (partial or full account) to your new IRA custodian. There is no tax, withholding, or penalty for moving funds via a trustee-to-trustee transfer and there is no limit on the amount of trustee-to-trustee transfers you may complete.

A 1099-R is not issued when a trustee-to-trustee transfer occurs and there is no withholding or tax due. Consequently, the trustee-to-trustee transfer is the preferred method to use when moving funds from one IRA to another.




I’m routinely asked questions about what taxes and rules apply when a distribution occurs from a retirement account. Here are the top ten rules you should know about distributions from retirement accounts.

The First 5 Facts Apply to Traditional IRA and 401(k) Accounts.

1. Early Withdrawal Penalty. A distribution from a traditional IRA or 401(k) before the account owner reaches 59 1/2 causes a 10% early withdrawal penalty on the amount distributed. This is in addition to taxes owed on the amount distributed. So, for example, if you take a $10,000 distribution from your traditional IRA at age 45 then you will be subject to a $1,000 penalty and you will also receive a 1099-R from your IRA custodian and will need to report $10,000 of income on your tax returns. Once you reach age 59 1/2, the 10% early withdrawal penalty does not apply.

2. Required Minimum Distributions. Whether you need the money or not, at age 70 1/2, the IRS requires a traditional IRA or 401(k) owner (unless still employed by employer 401(k)) to begin taking distributions from their retirement account. These distributions are subject to tax and the account owner will receive a 1099-R of the amount distributed that will be included on their tax return. The amount of the distribution is based on the person’s age and the account’s value. For example, someone with a $100K IRA who has turned 70 1/2 and is taking their first RMD would take $3,639 (3.79%).

3. Avoid Taking Large Distributions In One-Year. Because distributions from traditional retirement accounts are subject to tax at the time of distribution, it is wise to avoid taking too much in one year as a large distribution can push your distribution income and your other income into a higher tax bracket. For example, if you have  employment and or rental/investment income of $50,000 annually then you are in a joint income tax bracket of 15% on additional income. However, if you take $100,000 as a lump-sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket. If you could instead break up that $100K over two tax years then you could stay in 15% to 25% tax bracket and could reduce your overall tax liability. In short, only pull out what you need when you need it to lesson the immediate year’s tax liability.

4. Distribution Withholding. Most distributions from an employer 401(k) or pension plan (including solo K), before the age of 59 1/2, will be subject to a 20% withholding that will be sent to the IRS in anticipation of tax and penalty that will be owed. In the case of an early distribution from an IRA, a 10% withholding for the penalty amount can be made but you can also elect out of this automatic withholding provided you make an estimated tax payment or that you will otherwise be current on your tax liability.

5. If You Have Tax Losses, Consider Converting to a Roth IRA or Roth 401(k). When you have tax losses on your tax return you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401(k) to a Roth account. Whenever you convert a traditional account to a Roth account, you must pay tax on the amount of the conversion. In the end though, you’ll have a Roth account that grows entirely tax-free and that you don’t pay taxes on when you distribute the money. Using the losses when they are available is a good way to get your Traditional retirement funds over to Roth.

The Final 5 Rules are For Roth IRAs and Roth 401(k)s.

1. Roth IRAs Are Exempt from RMD. While traditional IRA owners must take required minimum distributions (“RMD”) when the account owner reaches age 70 1/2, Roth IRAs are exempt from RMD rules. That’s a great perk and allows you to keep your money invested as long as possible.

2. Roth 401(k)s Must Take RMD. Roth 401(k) designated accounts are subject to RMD. This is a confusing rule since Roth IRAs are NOT subject to RMD. Such is the tax code. How can you avoid this?  Simply roll your Roth 401(k) funds over to a Roth IRA when you reach 70 1/2.

3. Distributions of Contributions Are Always Tax-Free. Distributions of contributions to a Roth IRA are always tax-free. Regardless of age, you can always take a distribution of your Roth IRA contributions without penalty or tax.

4. Distributions of Roth IRA Earnings. In order to take a tax-free distribution from a Roth IRA, you must be age 59 1/2 or older and you must have had a Roth IRA for five years or longer. As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from a Roth IRA tax free. If your funds in the Roth IRA are from a conversion, then you must have converted the funds at least 5 years ago and must be 59 1/2 or older in order to take a tax-free distribution.

5. Delay Roth Distributions. Roth retirement accounts are the most tax efficient way to earn income in the U.S. As a result, it is best to distribute and use other funds and assets that are at your disposal before using the funds built up in your Roth account as those funds aren’t as tax efficient while invested.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook

Precious Metals Rules For Your Solo 401(k)

Self-directed 401(k) owners, companies in the industry, and many professionals have been confused on what rules, if any, govern when buying precious metals with a self-directed 401(k). There is a code section in IRC 408(m) that outlines what metals can be owned by a self-directed IRA and how they should be stored. I have an article that summarized those here. However, this section of the code is written for IRAs and many have questioned whether it should be applied to 401(k) accounts as well? The short answer is, yes, and here are two reasons why.

I. Most Solo K Plan Documents Adopt IRC 408(m).

Most 401(k) plans, including Solo 401(k)s, adopt IRC 408(m), which specify which precious metals your Solo K may own and provides a storage requirement. Since the plan documents restrict what precious metals your 401(k) may own, all accounts under the plan most follow the plan rules. Many may wonder, well can’t I just amend my 401(k) plan? Not exactly. Most Solo K plans are volume-submitter IRS pre-approved plans and take years to create and get approved with the IRS. A change requires approval from the provider of those plans and they’d have to change it for all their customers. This isn’t likely to occur, especially given point two below.

II. The IRS Wants Your Solo (k) to Follow the IRA Precious Metals Rule.

The IRS has issued guidance to 401(k) plans that are individually directed and has stated that the rules of IRC 408(m) should be followed when a 401(k) account purchases precious metals. To view the IRS analysis, check out their resource page here.

Consequently, Solo 401(k) owners buying precious metals should follow the IRA rules for precious metals and should only buy qualifying gold, silver, platinum, or palladium, and should make sure that such metals are stored with a third party qualifying institution (bank, credit union, or trust company).

Solo K 5500-EZ Requirement and $15,000 Failure to File Relief

Up close photo of an egg-shaped egg timer.Do you have a Solo 401(k)? Have you been filing form 5500-EZ each year for the Solo 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While some Solo 401(k)s are exempt from the 5500-EZ filing requirement, we have ran across many Solo 401(k) owners who should have filed, but have failed to do so.

The return a Solo 401(k) files is called a 5500-EZ, and it is due annually on July 31st for the prior year. If you have a Solo 401(k) and you have no idea what I’m talking about, stay calm, but read on.

Benefits of Solo 401(k)s

One of the benefits of a Solo 401(k) is the ease of administration and control, because you can be the 401(k) trustee and administrator. However, as the 401(k) administrator and trustee, it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns for the 401(k).  Solo 401(k)s with less than $250,000 in assets are exempt and do not need to file a 5500-EZ. All plans with assets valued at $250,000 or greater must file a form 5500-EZ annually. A tax return is also required for a Solo 401(k) when the plan is terminated, even if the plan assets are below $250,000. Recently, more and more Solo 401(k) owners have contacted us because they set up their Solo 401(k) online or with some other company, and were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000.  Some of these individuals have multiple years in which they should have filed the 5500-EZ, but failed to do so. The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return plus interest.

Failure to File Relief

Fortunately, the IRS has a temporary pilot program that provides automatic relief from IRS Late filing penalties on past due 5500-EZ filings.  The penalty relief began as a temporary program in 2014 and was made permanent via Rev Proc 2015-32.

In order to qualify for this program, your Solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your Solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse. There is a $500 fee due for each delinquent return up to a total of $1,500 or three years.  This program is available to all Solo 401(k) plans, regardless of whether it is a self-directed plan.

The IRS has provided details via Rev Proc 15-32. In order to qualify and receive a waiver of penalties under the program, you must follow the program exactly.  In short, you must do all of the following:

  1. File all delinquent returns using the IRS form in the year the filing was due. This must be via paper form.
  2. Mark on the top margin of the first page, “Delinquent Return Submitted under Rev. Proc. 2015-32.”
  3. Complete and include IRS Form 14704.
  4. Mail all documents to the IRS, Ogden, UT office.

In sum, if you have a Solo 401(k) plan that should have filed a 5500-EZ for prior years, then you should take advantage of this program, which will save you thousands of dollars in penalties and fees.  If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact our law firm as we are assisting clients with current and past due 5500-EZ filings for their Solo 401(k)s.