Direct rollovers are used to move funds to an IRA from qualified retirement plans(QRP). They can also be used to move funds to another QRP, or to a Roth IRA as a conversion (after December 31, 2007). Direct rollovers can also be used to move funds from a traditional Individual Retirement Account to a QRP. Direct rollovers cannot be used to move funds between individual retirement accounts.
QRPs include 401(k) plans, 403(b) plans, 457 plans, pension plans, profit sharing plans, defined contributions plans, defined benefit plans, and thrift savings plans. An individual retirement account is not a qualified plan for purposes of direct rollovers.
The trustee of a qualified retirement plan must provide information as to rollover eligibility to the employee. This information must be in writing.
Distributions from qualified retirement plans paid directly to individuals are subject to a mandatory 20% Federal income tax withholding requirement. The employee can request withholding greater than 20%. The mandatory withholding requirement cannot be waived, but can be avoided by sending the funds to a traditional IRA, to a Roth IRA as a conversion distribution(after 12/31/07) or to another qualified retirement plan.
Checks representing direct rollovers must be payable to a traditional account or qualified plan custodian or trustee.
If a check from a qualified plan is made payable to an employee, the QRP trustee must withhold 20% in Federal income tax. The employee has the right to rollover the distribution to a traditional IRA within 60 days.
The recipient of a distribution who has been subjected to the 20% withholding requirement has two choices:
• Make-up the 20% withholding from private funds (including loans).
• Rollover the amount received and pay taxes on the shortfall(including, the 10% additional tax on early withdrawals if the individual is under 59 1/2).
Direct rollovers can be used to move funds from a Roth designated account which is part of a 401-K plan or 403-B plan to a Roth account or to another Roth designated account. Roth IRAs cannot be moved to Roth designated accounts.
In the case of multiple eligible rollover distributions paid from qualified retirement plans, each distribution must be rolled-over within 60 days from the date of receipt.
Rollover elections are irrevocable.
Methods of Payment
A direct rollover may be accomplished by any “reasonable means” of direct payment to an Individual Retirement Account or to a qualified plan. For example:
• Electronic or wire transfers directed only to the custodian or trustee of an Individual Retirement Account.
• Checks negotiable only by the custodian or trustee of an Individual Retirement Account.
The IRS requires that checks representing direct rollovers should be made payable as follows: “ABC Bank as trustee/custodian of Individual Retirement Account of John Q. Smith.” The key is that the check can be negotiable only by an IRA custodian or trustee or by a qualified plan trustee.
Almost all distributions from qualified retirement plans(QRP) are eligible for rollover into a traditional account. QRP distributions cannot be rolled into a Roth account, but can be directly converted to a Roth after December 31, 2007. Most QRP distributions can be rolled to another QRP, but only if the new QRP agrees to accept the funds.
A surviving spouse has the same rollover rights as an employee or individual account owner.
Pretax and after tax contributions distributed from a QRP can be rolled to another QRP or to a traditional account. After 2007 such distributions can be directly converted to a Roth account.
After tax contributions cannot be rolled from any Individual Retirement Account to a QRP. This includes non deductible traditional IRA contributions and Roth IRAs.
The following distributions from qualified retirement plans cannot be rolled into an Individual Retirement Account:
• Required distributions
• Term certain payments of 10 years or more
• Lifetime distributions paid over the life expectancy of the employee (or the joint life and last survivor expectancy of the employee and the employee’s designated beneficiary)
• Death payments made directly to non spouse beneficiaries
• Corrective distributions
• Loans treated as deemed distributions
• The cost of life insurance coverage
• Dividends paid on employer securities
• Hardship distributions from 401(k) plans
Death Distributions Paid from QRPs
Spouse beneficiaries can rollover death distributions paid from QRPs.
Non-spouse beneficiaries cannot rollover death distributions paid from QRPs to their existing Individual Retirement Account; however, under the 2006 tax bill, non-spouse beneficiaries can use a direct rollover to move funds from a QRP to a beneficiary account beginning in 2007. If a distribution is paid directly to a non spouse beneficiary, such a distribution is not eligible for rollover to an Individual Retirement Account. Qualified plans do not have to offer the direct rollover option to non spouse beneficiaries. This information is contained in IRS Notice 2007-7, Section V, pages 5-9 (see link below).
Reporting Direct Rollovers
The IRS requires the retirement plan trustee to report a direct rollover as a distribution on IRS Form 1099-R. Individual account custodians and trustees must report direct rollovers on IRS Form 5498 as rollovers. After 2007 Roth funds received as direct rollovers from qualified plans are reported as conversions.
A direct rollover of traditional account funds to a qualified retirement plan must be reported as a distribution on IRS Form 1099-R by the IRA custodian or trustee. The correct distribution code is a “G.”
Qualified retirement plans are not required to accept rollovers. Some will accept rollovers, some won’t. Acceptance depends on the provisions of the plan document.
IRS Notice 2007-7
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