A Refresher on IRA Rollovers
By Carrie Horn, CISP, CHSP, TGPC, QPA
We have a client that has retired and wants to roll over his 401(k) plan from his former employer into his Roth IRA with us. Is he restricted from doing so because he no longer has eligible compensation for the year?
Unlike the requirements for making annual IRA contributions, an individual is never required to have eligible compensation (i.e., earned income) in order to roll over retirement plan assets to an IRA, including a Roth IRA. Rollovers from retirement plans to IRAs are allowed as long as the following requirements are met.
The plan is an eligible retirement plan (i.e., a qualified retirement plan, 403(b) plan, governmental 457(b) plan, or the federal Thrift Savings Plan)
The distribution is eligible to be rolled over
The distribution is rolled over within 60 days of receipt (if paid to the individual)
Our client, age 75, retired two years ago and wants to roll over her retirement plan to her Roth IRA at our financial organization. I know that she must take an RMD this year because she is 75 and no longer working. Does she have to take her required minimum distribution (RMD) from the plan before she rolls it over to her Roth IRA, or can she take the RMD from the Roth IRA after?
An RMD is not eligible to be rolled over to another retirement plan or IRA. Therefore, the individual must remove the RMD from the plan before rolling over the remainder of the assets to her Roth IRA. But sometimes the RMD is accidentally included in the rollover amount. In this situation, the Roth IRA owner must 1) inform the financial organization holding the Roth IRA that the RMD was mistakenly rolled over and 2) provide the RMD amount to the financial organization. The financial organization must report the RMD as a regular Roth IRA contribution. The organization should not report the RMD amount as a rollover contribution on IRS Form 5498, IRA Contribution Information. In addition, the plan administrator of the retirement plan should correct its distribution reporting so that it generates two Forms 1099-R: one Form 1099-R should report the RMD as being paid directly to the individual; the second Form 1099-R should report the eligible rollover amount.
If the Roth IRA owner is eligible to make a regular Roth IRA contribution, she can leave the RMD in the Roth IRA as a regular Roth IRA contribution—but only if it does not exceed the contribution limit for the year. For 2023, the contribution limit is $7,500 for an individual age 50 and older or the individual’s eligible income, whichever is less. If the Roth IRA owner does NOT meet the Roth IRA contribution eligibility requirements, the amount is considered an excess contribution. The excess contribution, along with the net income attributable to it, must be removed before the Roth IRA owner’s tax filing deadline, including extensions, for the year to avoid paying a six percent excess contribution penalty tax on the excess contribution amount.
One of our clients rolled over his 403(b) account to his Traditional IRA in March of this year. Today, we received another check from the same plan due to additional contributions being made after he took the distribution. Is he allowed to roll over more than one distribution during a 12-month period?
The 12-month rule applies only to IRA-to-IRA rollovers. There is no limit on the number of distributions from an eligible employer (not IRA-based) retirement plan that may be rolled over to an IRA. Therefore, the client may complete the rollover.
