An IRA rollover is a transaction that allows you to move funds from one retirement account to another without incurring any taxes. This type of transfer is not taxable, unless it is made to a Roth IRA or a designated Roth account from another type of plan or account. However, it must be reported on your federal tax return and include the tax base of a distribution that you do not transfer as income in the year of the distribution. Reinvesting an IRA is a great way to maintain its tax-deferred status and generate no taxes or penalties for early withdrawal.
To avoid withholding taxes, you'll want to choose what's called a direct reinvestment from an IRA, in which the check is made payable to your new financial institution as a new trustee or depositary. Within 60 days of receiving the distribution check, you must deposit the money into a cumulative IRA to avoid current income taxes. Traditional IRAs can give you a tax deduction on contributions in the year they are made, but withdrawals during retirement are taxable. If you need cash from reinvestment to pay your tax bill today, a Roth IRA could cause even more tax complications. Most of the pre-retirement payments you receive from a retirement plan or IRA can be “reinvested” by depositing the payment into another retirement plan or IRA within 60 days.
Cumulative IRAs can also offer a wider range of investment options and lower fees, especially compared to a 401 (k), which may have a short list of investment options and higher administrative fees. If you inherit a traditional IRA from your spouse, you can transfer the funds to your own IRA, or you can choose to title it as an inherited IRA. The limit for cumulative IRAs will be applied by adding up all of a person's IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as a single IRA for the purposes of the limit. Amounts that must be distributed over a given year under the required minimum distribution rules are not eligible for IRA reinvestment treatment. You have 60 days from the date you received the distribution of an IRA or retirement plan to transfer it to another plan or IRA. Nor can you make a transfer during this 1-year period from the IRA to which the distribution was transferred. I have seen this happen many times throughout my career.
Even if you successfully execute an IRA reinvestment, your plan's trustee or depositary may erroneously report in the 1099-R that they issue to you and the IRS.
