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What are IRA rollovers? Here are the basics

A rollover is the withdrawal of funds from an IRA and the transfer of those funds into another IRA. The following requirements must be met so that the IRA may keep its tax deferral.

New IRS rule

You can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own, whether traditional, Roth, SEP, or SIMPLE.

You can, however, continue to make as many trustee-to-trustee transfers between IRAs as you want. A trustee-to-trustee transfer is one in which the trustee of your IRA (that is, the custodian holding it) transfers your IRA funds directly to another custodian instead of to you first.

You can also make as many rollovers from traditional IRAs to Roth IRAs ("conversions") as you want.

Premature withdrawals and insufficient distributions from IRAs

Premature withdrawals are those that occur before the individual reaches age 59½. The IRS levies a penalty tax of 10 percent of the amount withdrawn if funds are withdrawn prematurely.

No penalty tax is charged in the following situations

  • Attainment of age 59½

  • Periodic payments made in the form of a life annuity

  • Deductible medical expenses

  • Buying a home for the first time if the home is to be a principal residence. The limit is $10,000 over the homebuyer's life.

  • Qualifying health insurance premiums if the individual is unemployed for at least twelve weeks

  • Qualifying educational expenses

  • Disability or death

  • The distribution is due to an IRS levy of the qualified plan

  • The distribution is a qualified reservist distribution

At 70½, you must take distributions from your IRA

Individuals are required to take distributions from their accounts at least once per year once they reach the age of 70½, and they must withdraw certain minimums figured by the IRS. If they fail to, they will be penalized for insufficient distributions. This penalty is half of the amount they did not withdraw.

For example, if you are required to withdraw $300 during a certain time and withdraw only $200, you will be required to pay half of the $100 difference, or a penalty of $50.

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How to calculate your required minimum distribution

The IRS provides life expectancy tables one can use to calculate the required minimum distribution after age 70½. You may use one of the following methods as long as it meets the minimum distribution requirement:

  • Division of the account balance by your life expectancy from the appropriate table each year.

  • Conversion to a life annuity (or life and joint survivor)

You can always take more but not less than the required minimum distribution. However, you get the greatest tax savings by only taking the required minimum distribution.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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