IRA IRA Rollovers and Transfers 1 — Questions and Answers
Question 1: What is the key difference between a direct IRA transfer and a 60-day rollover?
- A transfer is taxable; a rollover is not
- In a direct transfer, funds move directly between institutions; in a rollover, the account holder receives the funds then re-deposits them (Correct answer)
- A rollover requires IRS approval; a transfer does not
- Transfers are limited to once per year; rollovers are not
Correct answer: In a direct transfer, funds move directly between institutions; in a rollover, the account holder receives the funds then re-deposits them
In a direct transfer, the custodian sends funds directly to the new institution with no tax withholding; in a 60-day rollover, the account holder receives the funds and must re-deposit them within 60 days.
Question 2: How many times per year can an individual perform an indirect (60-day) IRA-to-IRA rollover?
- Unlimited
- Once per IRA account
- Once per year across all IRAs (Correct answer)
- Twice per year
Correct answer: Once per year across all IRAs
Under IRS rules (after the Bobrow v. Commissioner case), only one indirect rollover is allowed per year across all of an individual's IRAs combined.
Question 3: When rolling over a 401(k) to a traditional IRA, how much mandatory withholding applies to a lump-sum distribution?
- 0%
- 10%
- 20% (Correct answer)
- 25%
Correct answer: 20%
Employer plans are required to withhold 20% for federal taxes on lump-sum distributions, even if you intend to roll the funds over.
Question 4: What must the account holder do if 20% was withheld from a 401(k) distribution they intend to roll over to an IRA?
- The rollover is automatically reduced by 20%
- They must deposit the full pre-withholding amount using other funds within 60 days to avoid tax on the withheld portion (Correct answer)
- They must file Form 8606 to reclaim the withheld amount
- Nothing; the withholding automatically transfers to the IRA
Correct answer: They must deposit the full pre-withholding amount using other funds within 60 days to avoid tax on the withheld portion
To avoid taxes on the 20% withheld, the account holder must deposit the full original amount (making up the 20% from other funds) into the IRA within 60 days.
Question 5: Can a Roth 401(k) be rolled over directly into a Roth IRA?
- No, they are different account types
- Yes, and no taxes are owed on a qualified direct rollover (Correct answer)
- Yes, but only the earnings portion is taxable
- Only if the Roth IRA is at least 5 years old
Correct answer: Yes, and no taxes are owed on a qualified direct rollover
A Roth 401(k) can be rolled directly into a Roth IRA tax-free, and the Roth IRA's 5-year clock controls qualified distributions going forward.
Question 6: Which type of distribution from an IRA is NOT eligible to be rolled over?
- A lump-sum distribution from a traditional IRA
- A required minimum distribution (RMD) (Correct answer)
- A rollover from a prior employer's 401(k)
- A distribution from an inherited IRA to a spouse beneficiary
Correct answer: A required minimum distribution (RMD)
Required minimum distributions (RMDs) are not eligible for rollover; they must be withdrawn and cannot be re-deposited into an IRA.
IRA IRA Rollovers and Transfers 1
What is the key difference between a direct IRA transfer and a 60-day rollover?