Can I roll a retirement plan distribution into an IRA?


If they're asking this question, an investor probably has a 401(k) or other retirement plan through a former employer. The short answer is yes – most retirement plans allow a former employee to roll their plan funds over into an IRA after they've left their employer's service. However, there's more than one way to do a rollover, and how it's done can be critical.

In most cases, the best strategy is to do a direct rollover. This is a direct transfer of funds from an employer-sponsored plan to an IRA. The administrator of an employer-sponsored plan may send the check right to the trustee of the IRA a former employee has selected. That way, the money never passes through the former employee's hands. Alternatively, the plan administrator may give the check to the former employee to deliver to the IRA trustee. This also qualifies as a direct rollover as long as the check isn't made payable to the former employee. Instead, it should be made payable to the IRA trustee for the former employee's benefit. A direct rollover will avoid tax consequences and penalties.

An investor can also do an indirect rollover, but it's rarely a good idea. Here, the check is made payable to the former employee. When they receive the check, they can cash it and deposit the funds in the new IRA within 60 days. The big drawback: Before releasing plan funds to a former employee, the plan administrator is required to withhold 20 percent of the taxable amount for federal income tax. To make sure they deposit the correct amount, they must replace this 20 percent out of their own pocket. However, if an investor properly follows all the IRS rules for rollovers, they will avoid tax consequences and can get back the amount withheld for taxes when they file their annual income tax return.

An investor can roll a distribution into either a traditional IRA or Roth IRA. If they roll the funds over into a Roth IRA (often called a "conversion") they'll include the taxable portion of the distribution in their taxable income in the year they roll the funds over. (A distribution from a retirement plan's Roth account can only be rolled over into a Roth IRA.)

An investor may not be allowed to roll over certain types of retirement plan distributions into an IRA. Further, when considering a rollover, to either an IRA or to another employer's retirement plan, an investor should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option. Consult a tax professional for details.

Important note: Equitable believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional.

Information provided has been prepared from sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is not intended for solicitation or trading purposes. Please consult your tax and legal advisors regarding your individual situation. Neither Equitable nor any of the data provided by Equitable or its content providers, such as Broadridge Investor Communication Solutions, Inc., shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the Equitable website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Please be advised that this materials is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transactions(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.

Equitable Financial Life Insurance Company (NY, NY). Securities are offered through Equitable Advisors, LLC, NY, NY 212-314-4600 (member FINRA / SIPC).  Equitable and Equitable Advisors are affiliated companies, do not provide legal or tax advice and are not affiliated with Broadridge Investor Communication Solutions, Inc.


© Copyright 2018 Broadridge Investor Communication Solutions, Inc. All rights reserved.

What's the next step for you?

A financial professional can help you decide. Let's talk.

Find a financial professional

GE-126775 (08/2017)