Handle your IRA rollovers with care
There are many good reasons for rolling over funds from one IRA to another — or from a 401(k) plan or other employer retirement plan to an IRA. Perhaps you wish to consolidate retirement savings into one account. Or maybe you’re moving funds from one account into another that offers more attractive investment options. Whatever the reason, care should be taken to avoid triggering unnecessary taxes and penalties.
Direct vs. indirect rollovers
Generally, there are two ways to move funds from an employer plan to an IRA or from one IRA to another: a direct transfer or an indirect rollover. With a direct rollover, you ask the plan administrator or the financial institution holding your IRA to move the money directly to another IRA in a trustee-to-trustee transfer. Because you never touch the money, direct transfers have no tax consequences. With an indirect rollover, you withdraw funds from your retirement plan or IRA and deposit them into another IRA. There’s no tax on indirect transfers if you complete the rollover within 60 days.
Direct transfers are almost always preferable. First, there’s no risk of violating the 60-day rule. While completing a rollover within 60 days seems like a simple proposition, you’d be surprised how often people miss the deadline. Plus, direct transfers aren’t subject to the one-rollover-per-year rule (see below), which often trips people up and triggers unexpected taxes and penalties.
Another drawback of indirect rollovers is that typically taxes will be withheld from your distribution. So, if you want to roll over the full amount of the distribution, you’ll need to use other funds to cover the shortfall.
For example, suppose Monica receives a $10,000 distribution from her 401(k) plan that’s eligible for a rollover. Her employer withholds 20% of the distribution ($2,000) for income taxes and pays Monica $8,000. Monica wants to roll over the full $10,000, so she withdraws $2,000 from her savings account and deposits it, along with the $8,000 check from her employer, in an IRA. If she rolls over only $8,000, she’ll owe income tax on the remaining $2,000 and may have to pay a 10% early withdrawal penalty. (No withholding is required for direct transfers.)
Common rollover mistakes
As previously noted, it’s common for people to miss the 60-day deadline for indirect rollovers, triggering unwelcome taxes and penalties. But an even more dangerous mistake is making multiple indirect rollovers in one year.

The “one-rollover-per-year” rule is trickier than it sounds. For one thing, it prohibits you from making more than one indirect rollover in any 12-month period. Many people mistakenly believe that the rule is applied on a calendar-year basis. But if you perform an indirect rollover in December of one year and another in January of the following year, you’ll violate the rule.
Another potential trap is that the rule applies on an aggregate basis. This means you can’t make more than one tax-free indirect rollover in a 12-month period, even if they involve different IRAs. For purposes of the one-rollover-per-year rule, all of your IRAs — including Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs as well as traditional and Roth IRAs — are treated as a single IRA. However, the rule doesn’t apply to:
- Rollovers from traditional IRAs to Roth IRAs (conversions),
- Trustee-to-trustee transfers to another IRA,
- IRA-to-plan rollovers,
- Plan-to-IRA rollovers, or
- Plan-to-plan rollovers.
The consequences of violating the one-rollover-per-year rule are harsh. If you receive a distribution from an IRA of previously untaxed amounts, and you performed a rollover within the preceding 12 months, you’ll have to include the distribution in your gross income. In this case you may be subject to a 10% early withdrawal penalty. What’s more, if you deposit the distributed amounts in another (or even the same) IRA, they may be treated as an excess contribution and subject to an excise tax of 6% per year until you withdraw them.
Turn to your advisor
The safest approach is to avoid indirect rollovers and use direct rollovers, which aren’t subject to the one-rollover-per-year rule. Contact your advisor if you have questions about rolling over an IRA account.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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