Retirement Plan holders who take a distribution before 59 ½ are typically subject to tax penalties for withdrawing those funds. But what if you leave your job and need to move your 401(k), or what if you find a higher interest-bearing retirement account than your current plan holder offers? Understanding the IRA rollover rules for 2023 can help you streamline the process of transferring those funds and avoid tax penalties that can otherwise affect your nest egg.

IRA Rollover Rules for 2023 and What They Mean for Your Retirement Plan

How Do Rollovers Work?

Rollovers are a tax-conscious method for moving funds from one qualified retirement plan to another, like an IRA. The three most common ways to initiate a rollover are:

Direct Rollover: Funds are moved directly from your current retirement plan or IRA by your current plan administrator.

Trustee-to-Trustee Transfer: Funds are transferred directly from the current custodian of your IRA account to another IRA or retirement plan.

Indirect Rollover: The fund’s distribution is typically issued to you by check and must be deposited into another qualified retirement plan within 60 days. Funds not re-deposited into the new retirement plan within that time can incur tax penalties.

IRA Rollover Rule Changes to Note

529 Education Plans are tax-advantaged plans designed to encourage saving for higher education. Currently, any funds withdrawn and not used for ongoing education are subject to a 10% penalty.

Starting in 2024, 529 plan holders can roll up to $35,000 into their Roth IRAs, effectively using those funds to bolster retirement savings. Roth IRAs will still be subject to yearly contribution limits ($6,500 for those under 50 and $7,500 for individuals 50 and above), and the 529 account must have been open for at least 15 years.

Does a Rollover Make Sense for Your Unique Financial Goals?

Before deciding if a rollover makes sense for your unique financial goals, there are a few things to consider.

One-per-year rule: Plan holders can typically initiate one rollover during a 12-month period, regardless of the number of IRAs owned. Plan holders who receive a distribution from an IRA of previously untaxed amounts must include IRA-to-IRA rollovers made in the previous 12 months in their reported gross income, which may result in tax implications like a 10% early withdrawal tax or be treated as an excess contribution.

Eligible Rollover Distributions: Distributions must meet the current plan’s criteria for distribution, like termination of employment. For IRAs, plan holders can roll over any distribution except required minimum distributions (RMD) or excess contributions.

Tax Withholding: IRA distributions are subject to the standard 10% withholdings unless you opt out of withholding or set a different withholding amount. Trustee-to-trustee transfers are typically exempt from tax withholding until the funds are distributed from the new plan.

Consult with a Retirement Advisor About IRA Rollovers

The best way to determine if a rollover aligns with your retirement goals is to consult with your retirement advisor. When you partner with Davis Capital Management, we can help create a retirement plan that considers your long-term goals and is geared towards what matters most: managing your nest egg for a lasting legacy.

Sources: IRS and CNET

irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

cnet.com/personal-finance/investing/retirement-account-changes-how-new-rules-will-impact-your-ira-and-401k/