Transfers, Rollovers, and Distribution Strategies

Once retirement assets are accumulated, they often move between accounts or to the customer. The exam tests three movement types: direct transfers, direct rollovers, and indirect (60-day) rollovers. Each has different tax-withholding and frequency rules.

What is a direct trustee-to-trustee transfer?

Assets move directly from one individual retirement account (IRA) or qualified plan trustee to another.

• No tax withholding
• No distribution check to the account owner
• Not limited by the once-per-year rollover rule
• The customer never takes constructive receipt of the funds

Exam Tip: Gotchas

Direct trustee-to-trustee transfers are unlimited in frequency. The once-per-year rollover rule applies only to 60-day IRA-to-IRA rollovers. An exam scenario with "monthly transfers between two IRAs" is fine if they are trustee-to-trustee.

How does a direct rollover from a qualified plan work?

Assets move directly from a qualified plan (for example, a 401(k)) to an IRA or another qualified plan.

• No 20% withholding (funds never pass through the account owner)
• The distributing plan reports the transaction on Form 1099-R with the rollover code

Exam Tip: Gotchas

A direct rollover is not the same as an indirect (60-day) rollover. Direct = funds move plan-to-plan, no withholding. Indirect = participant receives a check, 20% mandatory withholding applies, and the participant has 60 days to complete the rollover (and must make up the withheld 20% out of pocket to roll over the full amount).

What are the rules for a 60-day indirect rollover?

The plan or IRA distributes funds to the account owner, who has 60 days to redeposit into a qualified retirement account.

Key rules:

• For qualified plan distributions paid to the participant, there is mandatory 20% federal tax withholding; to complete a full rollover, the participant must make up the withheld 20% from other funds
• Once-per-year limit: Only one 60-day IRA-to-IRA rollover per 12-month period (applies across all of the customer's IRAs aggregated); does NOT apply to direct trustee-to-trustee transfers or qualified-plan rollovers
• Missing the 60-day deadline converts the distribution to a taxable event (plus 10% penalty if under 59-1/2)

Exam Tip: Gotchas

• The mandatory 20% withholding applies to qualified-plan distributions paid to the participant that could have been rolled over. It does NOT apply to direct trustee-to-trustee transfers and does NOT apply to most IRA distributions. A customer who takes a distribution check from a 401(k) and intends to roll it over in 60 days must come up with the withheld 20% out of pocket to complete a full rollover. Otherwise the shortfall becomes a taxable distribution.
• The once-per-year rollover rule applies to IRA-to-IRA 60-day rollovers, aggregated across all of the customer's IRAs. It does NOT apply to trustee-to-trustee transfers (unlimited) or to rollovers from a qualified plan to an IRA (unlimited). Failing to distinguish these is a common exam trap.

Think of it this way: Direct transfers are plumbing. Money moves from one tank to another and never touches the customer's hand. A 60-day rollover is a trip to the bank: the customer holds the money for a short time, and the Internal Revenue Service (IRS) imposes strict timing rules to prevent abuse.

What distribution strategies are available from retirement accounts?

• Lump-sum distribution: Entire account paid at once; taxable in the year received (ordinary income); for pre-1936 birthdate participants, may qualify for 10-year forward averaging in certain qualified plans
• Periodic payments: Scheduled distributions (monthly, quarterly, annually) used to satisfy Required Minimum Distributions (RMDs) or generate income
• Annuitization: Conversion of an account balance into a stream of payments for life or a period certain (common with variable annuities)
• Systematic Withdrawal Plan (SWP): Customer selects a fixed dollar amount or fixed percentage for periodic withdrawal from a mutual fund account
• RMD-based distributions: After age 73, Traditional IRA owners must withdraw at least the Required Minimum Distribution each year (calculated using IRS Uniform Lifetime Table divisors)

Which investments are permitted in retirement accounts?

Items NOT permitted inside IRAs:

• Collectibles (art, antiques, gems, most coins)
• Life insurance contracts (other than inside qualified plans)
• S-corporation stock (inside IRAs)

Exam Tip: Gotchas

Collectibles, life insurance, and S-corporation stock are prohibited inside IRAs. An IRA holder who buys gold coins or a collectible inside the IRA causes a deemed distribution of the amount invested, triggering taxes and possibly the 10% early-withdrawal penalty.

How are retirement account distributions taxed?

• Traditional IRA / SEP / SIMPLE / 401(k) / 403(b): Distributions are 100% ordinary income to the extent of pre-tax contributions and earnings; not subject to capital gains rates regardless of how long assets were held
• Roth IRA: Qualified distributions are tax-free if the account has aged 5 years AND the owner is 59-1/2+, dies, becomes disabled, or takes first-time homebuyer funds
• Non-deductible Traditional IRA contributions: Create "basis" that is returned tax-free using the pro-rata rule; tracked on IRS Form 8606

Exam Tip: Gotchas

Retirement distributions are taxed as ordinary income, not capital gains, regardless of how long the assets were held inside the account. A mutual fund held 20 years inside a Traditional IRA is still taxed at ordinary rates when distributed.

How does the SECURE Act 10-year rule affect inherited IRAs?

For IRA owner deaths after 12/31/2019, most non-spouse beneficiaries must empty the inherited IRA within 10 years of the original owner's death:

• If the original owner died before the Required Beginning Date (RBD): no annual RMD required during the 10-year period
• If the original owner died after the RBD: annual RMDs required during the 10-year period

Eligible Designated Beneficiaries (EDBs) are exempt from the 10-year rule and may stretch distributions over their lifetime:

• Surviving spouse
• Minor children of the decedent (until age 21)
• Chronically ill or disabled persons
• Persons not more than 10 years younger than the decedent

Exam Tip: Gotchas

The 10-year rule applies to non-spouse beneficiaries for deaths after 12/31/2019. A surviving spouse is an EDB and can still stretch distributions (or roll the inherited IRA into their own IRA). Minor children are EDBs only until age 21, after which the 10-year clock starts.

What age-based rules apply to retirement account distributions?

Exam Tip: Gotchas

457(b) governmental plans are exempt from the 10% early-withdrawal penalty. A participant under 59-1/2 can take a distribution from a 457(b) without the penalty, although ordinary income tax still applies. This exception does NOT apply to 401(k) or 403(b) plans.