Normally you pay a penalty for withdrawing money from a 401(k) or IRA before you turn 59 1/2. One exception is when you roll over assets into a different IRA. You can set up an IRA to receive the rollover, or put the money in an established IRA.
Account to Account
The IRS has rules for which accounts you can roll over. Acceptable rollovers include:
- Roth IRA to another Roth.
- 401(k) to a Roth IRA.
- 401(k) to a traditional IRA.
- Traditional IRA to another traditional IRA.
- Traditional IRA to a Roth IRA.
You can't roll over a Roth account to a traditional IRA. In addition, usually you have to wait until you leave your job to roll over a 401(k) to an IRA.
Someone who's barred from contributing to a Roth because of a high income can contribute to a traditional IRA, then roll the money over.
Reasons for Rollover
- If you inherit an IRA from someone other than your spouse, you can't add any money to the account. Instead, you can have the IRA administrator roll the assets over to a beneficiary account and begin making withdrawals from that.
- You've left your job and the company won't let you maintain your old 401(k). Or you may believe that managing the money on your own will bring better yields.
- You want to roll your traditional IRA into a Roth. You pay tax on the rollover, but there's no tax on Roth withdrawals. Unlike an IRA, there's also no minimum annual withdrawal in retirement.
- You think a different IRA manager offers a better list of investments.
Timing a Rollover
When you transfer money from one IRA into a rollover account, you don't have to empty out the first IRA. Once you make the rollover, however, you have to wait a year before rolling over more money out of that account. You must also wait a year before rolling any money over from the rollover IRA. This rule doesn't apply to any IRAs that aren't involved in the rollover.
You can roll over money into a Roth or traditional IRA at any age. However if you have to take mandatory distributions from an IRA account -- something the IRS requires every year after you turn 70 1/2 -- you cannot roll them over into another account.
Withdrawing From Rollover IRAs
If you roll over assets from one of your accounts into an IRA, you treat the rollover account like any other IRA. You can withdraw assets as soon as you turn 59 1/2 -- any earlier and you pay a 10 percent tax penalty on withdrawals. If you make a roll over into a beneficiary IRA, you have to begin withdrawals in the following year. The IRS has tables online for figuring out how much your minimum withdrawal is.