An individual who is planning to retire will often roll over the assets in her qualified plan into a traditional IRA, e.g., so that she will have more control over how the funds are invested. If the plan permits (and only if the plan permits), such an individual may also be able to roll over the assets in a traditional IRA to one of the following types of plans:
* An Internal Revenue Code §401(a) qualified plan, which would include a 401(k) plan;
* An IRC §403(a) annuity plan;
Advertisement
* An IRC §403(b) tax sheltered annuity; or,
* An IRC §457 governmental plan.
To qualify as a tax-free rollover, the amount received from the traditional IRA must be rolled over to an eligible retirement plan for the benefit of the individual for whom the traditional IRA was maintained; the rollover must be made not later than the 60th day after the day on which the individual receives the traditional IRA payment or distribution that is being rolled over, unless a hardship exception to the 60-day rollover requirement applies; and the maximum amount of the traditional IRA distribution that may be rolled over to an eligible retirement plan may not exceed the part of the amount distributed that would be includible in gross income if it weren't rolled over.
Observation: Thus, after-tax contributions to a traditional IRA may not be rolled over to a qualified plan, but deductible contributions and all earnings on contributions (including earnings on nondeductible contributions) can be rolled over.
Example 1: Your client has $180,000 in her traditional IRA, which consists of $45,000 of nondeductible contributions, $10,000 of deductible contributions and $125,000 of earnings on the contributions. She is also a participant in her employer's 401(k) plan, which permits rollovers to that plan from a traditional IRA. She may roll over $135,000 from her traditional IRA to the 401(k) plan.
Also note that any amount that would be a required minimum distribution for the year of distribution from the traditional IRA may not be rolled over.
Observation: Since, as pointed out above, rollovers from a traditional IRA to a qualified plan may be made only if the terms of the plan allow such a rollover, before withdrawing funds from a traditional IRA with the intention of rolling them over to an eligible retirement plan, the employee/IRA owner should make sure that the eligible retirement plan accepts such rollovers.
By rolling over all the deductible contributions and earnings in a traditional IRA to a qualified plan, the IRA owner would be able to do one of the following:
1. He would be able to withdraw funds left in the traditional IRA after the rollover completely free of tax and penalty or at little tax and penalty cost.
Example 2: The same facts apply as in Example 1. If your client rolls over all of her nondeductible contributions and earnings in her traditional IRA to her company's 401(k) plan, then immediately after the rollover she would be able to withdraw the $45,000 of nondeductible contributions remaining in her traditional IRA without including any of the amount withdrawn in her gross income, and without having to pay any penalty, even if she is under age 59-1/2 at the time of the withdrawal, and even if no other exception to the imposition of the penalty applies. This is because the early-withdrawal penalty is imposed only on amounts includible in gross income.
