As a retirement investor you have a lot to learn and many decisions to make.

You have to decide on a retirement investment type, 401k, traditional IRA or Roth IRA.  

You have to make the proper investment choices, stocks, bonds, mutual funds, large cap, mid cap, small cap, cash balanced, international?  So much to choose from.

And then you have to make sure that the contribution amount you decide on is an amount that you can afford to consistently make.  

Now in addition to all those decisions, you also have to learn retirement account rules.    Retirement investments, 401k’s and Individual Retirement Accounts, have specific rules that you must follow.  If you don’t know those rules and fail to follow them, you could pay taxes plus additional tax penalties….that can get expensive.

The IRS does seem to have a way to make things complicated; IRA rollover rules and IRA withdrawal rules are no exception…they can also be complicated.   Sometimes rollovers are taxable, sometimes not.  Sometimes withdrawals are taxable, sometimes not.   

Let’s review the rules for you to make you a better retirement investor, and possibly save you some money.

IRA Rollover Rules:

Traditional IRA Rollovers:

• Direct rollovers are not taxable.
• There are no taxes withheld on a direct rollover.
• There are no withdrawal penalties on a direct rollover.
• A direct rollover is when the financial institutions transfer the money between themselves, and you never touch the money.
• With an indirect rollover you can be taxed and incur penalties.
• An indirect rollover is when you take possession of the money during the rollover process.
• With an indirect rollover, you have 60 days after you receive the money to redeposit it.
• If you do not redeposit within 60 days, you are subject to taxes and will incur the 10% tax penalty.
• Traditional IRA to a Roth IRA,  taxable.

Roth IRA Rollovers

• There is no such thing.
• A Traditional IRA rollover to a Roth IRA is called a conversion not a rollover.
• You are taxed on the conversion amount at the time of the conversion.
• With a conversion, you do not incur the 10% tax penalty even if you are under the age of 59 1/2.

401k Rollovers

• Tax-free if you transfer your 401k plan money to the another 401k plan, and you never take possession of  the money.
• In other words one financial institution transfers the money to another financial institution without you seeing or touching the money.
• This type of rollover is called a direct transfer or trustee-to-trustee transfer.
• If you ever change employers and want to roll over your 401k tax-free, be sure to tell the Human Resource administrator that you want a direct transfer to your new employer’s 401k plan.
• Taxable if you personally take possession of the rollover money during the rollover process.
• If you do decide to take possession of the rollover money, you have 60 days to redeposit it into another qualified retirement plan.
• If you do not redeposit it the rollover check within 60 days, you will be taxed and incur a 10% early withdrawal penalty.

IRA Withdrawal Rules:

Traditional IRA Withdrawals:

• Under age 59 ½,  withdrawals and earnings are taxable because you are making an early withdrawal.
• Under age 59 1/2, an early withdrawal penalty of 10% applies.
• After age 59 1/2, your withdrawals and earnings on the account are taxable, they have never been taxed.
• After age 59 1/2, you will not incur the 10% withdrawal penalty.
• Traditional IRA withdrawals must begin after you reach age 70 1/2.
• These required withdrawals are called Required Minimum Distributions.
• The required withdrawal amounts are determined by the IRS.

401k Withdrawals:

• Before age 59 1/2,  withdrawals are considered early withdrawals.
• Early withdrawals are taxed and incur a 10% tax penalty.
• You may qualify for a hardship withdrawal; but you will still pay taxes and incur the 10% penalty.
• Hardship withdrawals must be for one of the following reasons:
• A primary home purchase, to pay medical expenses that you are not being reimbursed for. to prevent being evicted from your home,  to pay for higher education costs.

Roth IRA Withdrawals:

• Roth IRA withdrawals are not taxable, the money was already taxed.
• Earnings on your Roth IRA are taxable, the money has never been taxed.
• You do not have to begin withdrawals at age 70 1/2.
• On any converted amounts, if you withdraw before age 59 1/2, you will have to pay the 10% penalty, unless you meet one of the 10% tax exceptions listed below.

Roth Tax Exceptions on Converted Amounts:

If you meet any of the following exceptions, you may not have to pay the 10% withdrawal tax on your conversion amounts.

• You meet the 5 year rule.
• You are over age 59 1/2.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the withdrawal amount to pay first-time home buyer amounts.
• You have significant nonreimbursed medical expenses.
• After losing your job, you are paying medical insurance premiums.
• The distributions are not more than your qualified higher education expenses.

Learn the rules.  If you are thinking about making an IRA rollover or withdrawal, and you are unsure about the rules and regulations, learn them before making your move.   Knowledge is power; knowing the rules could save you money in taxes and penalties.

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