Direct IRA Rollovers Q&A

In my previous article, I outlined a few essential concepts about IRA rollovers – specifically direct IRA rollovers.

Before moving on to indirect rollovers, I will share a few actual questions about general IRA situations that I heard from real customers and provide basic answers that should apply to most IRA owners in a comparable situation. Because complete rules and regulations governing retirement accounts are extensive, even minor differences between two similar situations could have different answers.

Therefore, my answers relate to the general cases provided here and will answer most IRA owners in similar situations – but not all cases.

Q.  Can I transfer my Traditional IRA (TIRA) to my employer’s 401(k) plan and then borrow it?

A.  This is possible, assuming your employer 401(k) plan allows TIRA-to-plan rollovers and the 401(k) plan allows loans for which you would qualify. Note that if your TIRA has any basis, this may not be rolled to the employer-sponsored retirement plan.

Also note that many 401(k) plans have tightened their rules on who is eligible for a loan and the justification you must provide to qualify for a loan. However, this will vary by 401(k).

Q.  I have a TIRA that I opened 16 years ago with a bank that is still there. When we moved, I opened a TIRA at our new credit union. Do I have to transfer the former TIRA with the bank over to the TIRA I recently opened at the credit union?

A.  There is no limit on the number of TIRAs or Roth IRAs (RIRAs) you may hold at any given time. When it comes to calculating required minimum distributions or determining how much of a withdrawal you have made is taxable and how much is after tax, the IRS will require that you treat all your TIRAs as though they are one TIRA and all your RIRAs as though they are one RIRA. The reason most IRA owners combine them is for simplicity and easy of accountability and perhaps avoiding multiple duplications of some annual account expenses.

Q.  I retired last year and am just now getting around to rolling over my former employer’s sponsored retirement plans to my TIRA. The former employer is a non-profit hospital. My 403(b) balance transferred fine, but I just got a notice that my old 457(b) plan that the employer used to offer to only certain employees many years ago – it hasn’t been offered in about 20 years – will not be transferred to my TIRA. What gives? It is not a large amount, but I am concerned. Does this mean that I am going to lose this?

A.  Probably not. Because the 457(b) deferred compensation plan you mention is offered by a non-profit employer, it is not transferrable to your TIRA or anywhere else. Like the deferred compensation plan of for-profit companies, the funds inside the non-profit 457(b) plan belong to the employer, not to you. While specific terms vary among specific plans, the plan will have a payment agreement that is required to spell out how the funds in the plan will be paid to you once you have retired or have attained a certain age. However, the assets must stay with the employer until they are distributed to you.

A government 457(b) plan does not operate this way. These deferred compensation plans may be rolled over to your TIRA once you have separated from the employer or retired.

Q.  I have a SIMPLE IRA at work, and I really dislike the investment choices my employer has provided for my SIMPLE IRA. Can I roll this SIMPLE IRA over into my own TIRA?

A.  Yes, providing at least two years has past since the initial setup of this SIMPLE IRA. Simply contact your TIRA custodian, who should help you complete the necessary transfer forms. After the initial two-year waiting period, the SIMPLE IRA custodian may not prevent you from transferring the SIMPLE IRA balance to your TIRA. However, they may asses a transfer charge for doing this.

Q.  I retired from my previous employer earlier this year. At that time, I filled out the paperwork to have my profit sharing plan balance transferred to my TIRA directly. A week later I received a call from my former employer telling me the check for the transfer was available for me to come and pick up, which caught me by surprise. I checked the block on the transfer paperwork to DIRECTLY transfer the profit sharing balance to my TIRA. I quickly went to pick up the check, took it to my current brokerage at Fidelity and had them deposit it into my TIRA. Am I going to have to pay tax on this transfer since I carried the check myself instead of it being transferred from the employer to my TIRA?

A.  Probably not. If the check was made out to your TIRA – and not to you personally –then the IRS will consider this an agent-to-agent transfer and there is no 60-day transfer requirement. You only would have to transfer it to your TIRA within the time period the check itself requires, which is usually around 30 days. Additionally, if the employer made a mistake and did make out the check to you, they would have withheld 20% and sent it to the IRS as a tax withholding. You then would have had to make up the 20% withholding sent to the IRS out of your pocket and deposit it and the withdrawal into your TIRA within 60 days. Otherwise, the IRS would consider this a taxable withdrawal for that year. The 20% withholding then would be declared as a tax withholding when you filed your taxes for the year.

Q.  Recently, I received a notice from a retirement plan administrator which I have never met that there is a retirement plan balance they currently administer from an employer I had almost 30 years ago, which I have completely forgotten. The retirement plan is called a SARSEP – at least that is what this administrator told me. I have no idea what they are talking about and the administrator was of no help, telling me only to see my tax advisor. It is a small amount of money, but do you have any idea what they are talking about, and what my options are?

A.  What the plan administrator is referring to is a Salary Deferral SEP, which existed prior to 1997. While new Salary Deferral SEPs were not offered after 1996, existing plans may be grandfathered. These employer-sponsored retirement plans are SEPs that contain employee salary deferral contributions and, like SEP and SIMPLE IRAs, are treated as TIRAs. You should get the account and routing numbers of the SARSEP and have your current IRA custodian do a direct transfer of this SARSEP amount to your TIRA.

I hope some of the cases that I discussed here give you a cleared understanding how to handle some of the situations within the scope of the current IRA direct rollover rules and guidelines. In the next article, I will move on to indirect ira rollovers which add another layer of complexity because, instead a direct transfer of funds from one IRA to another IRA, the IRA owner assumes custody of the funds for the interim period during the transfer process. However, the additional complexity should not raise any additional concerns. As long as the IRA owners understand the rollover process and required steps, the transfer process should be mainly a painless and straight forward experience.

Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and  IRA Quick Reference Guide.