An IRA rollover transfers assets from one administrator to another without the account holder depositing the funds into a personal account, avoiding income tax consequences. Different types of IRAs offer various tax breaks for retirement savings. An IRA rollover is different from an IRA transfer, with important tax implications and future use options for the account holder. An IRA rollover has no tax consequences and the account holder is not limited to a certain number of rollovers.
An IRA rollover is a method of transferring the assets in an IRA, short for Individual Retirement Account, from one administrator to another without the account holder depositing the funds into a personal account. The administrator is the brokerage house or account manager, while the account holder is the person who owns the funds. Making an IRA rollover, sometimes called a trustee-to-trustee rollover, is appropriate in certain situations to avoid income tax consequences.
People create IRAs to provide some tax breaks for savings designed to fund retirement. Some IRA accounts offer a tax break on funds deposited in them, but growth is taxed later. Other IRA accounts protect the growth of funds from taxes, but deposits are normally taxed. There are many different types of IRAs in the United States. Some IRAs are opened and managed by a single person, while employers can sponsor some types of IRAs for employees.
Keep in mind that an IRA rollover is different from an IRA rollover, although many people use the two terms interchangeably. The confusion is understandable because, in both cases, the funds in the tax-protected account end up in a different tax-protected account. However, the differences are important in terms of tax implications and in terms of future use options for the account holder.
With an IRA rollover, the funds never end up in the account holder’s hands, and they never cash a check. The account owner may receive a check for the value of his or her holdings in the old IRA, but the check is given to the new administrator and the account owner does not cash it. Instead, the account holder forwards the check to the new administrator for deposit into the new IRA account. In contrast, with an IRA rollover, the account holder deposits the funds from the old tax-protected account into his personal account and then writes a new check for the new IRA account.
In terms of taxes, an account holder who makes use of an IRA rollover does not receive any tax forms at the end of the year and does not need to report the IRA rollover on any income tax forms. Those who do an IRA rollover will receive Form 1099R for tax purposes, although, if done correctly, an IRA rollover has no tax consequences. With an IRA rollover, the account holder is not limited to a certain number of rollovers. With an IRA rollover, the account holder cannot make another rollover with the funds for 12 months, but can make an IRA rollover with the funds within the 12-month period.
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