Transfers, Rollovers, and Distribution Rules
Understanding how money moves between retirement accounts (and what happens when it comes out) is one of the most frequently tested areas on the Series 7. This section covers rollovers, required minimum distributions, and the exceptions to the early withdrawal penalty.
Direct Rollovers vs. 60-Day Rollovers
There are two ways to move money between retirement accounts, and the differences have major tax consequences:
| Feature | Direct Rollover (Trustee-to-Trustee) | 60-Day Rollover |
|---|---|---|
| Withholding | None | 20% mandatory federal withholding on employer plan distributions |
| Time limit | None (direct transfer) | Must deposit within 60 days |
| Frequency | Unlimited | One per 12-month period (IRA-to-IRA only) |
| Risk | Minimal | Miss the deadline = taxable distribution + possible 10% penalty |
- Direct rollovers avoid the 20% mandatory withholding that applies to eligible rollover distributions paid directly to the participant
- RMDs cannot be rolled over; they must be distributed and taxed
Exam Tip: Gotchas
- With a 60-day rollover from an employer plan, the plan withholds 20% for federal taxes. If the participant wants to roll over the full amount, they must come up with the 20% from other funds and deposit the full amount within 60 days. Otherwise, the withheld amount is treated as a taxable distribution.
- The IRA-to-IRA 60-day rollover is limited to once per 12-month period. Trustee-to-trustee transfers have no such limit.
Eligible Rollover Paths
Not all accounts can roll into all other accounts:
- Traditional IRA to/from 401(k), 403(b), governmental 457(b): allowed
- Roth IRA to Roth IRA (or Roth-designated accounts in employer plans): allowed
- Tax-exempt 457(b): NOT eligible for rollover to an IRA or other plan
- SIMPLE IRA: Can only roll into another SIMPLE IRA during the first 2 years; after 2 years, can roll into a traditional IRA or other qualified plan
Exam Tip: Gotchas
- Tax-exempt 457(b) plans cannot roll into an IRA. Only governmental 457(b) plans are eligible for rollovers. This is a common trap when questions list multiple plan types.
- SIMPLE IRA has a 2-year lockout. During the first 2 years, rollovers can only go to another SIMPLE IRA. After 2 years, the normal rollover rules apply.
Required Minimum Distributions (RMDs)
Once you reach a certain age, the IRS requires you to withdraw a minimum amount from most retirement accounts each year.
RMD Rules
- Must begin by April 1 of the year following the year the participant reaches age 73 (SECURE 2.0)
- Subsequent RMDs must be taken by December 31 of each year
- If the first RMD is delayed to April 1, the participant must take two distributions in that year (one by April 1, one by December 31)
RMD Penalty
- Penalty for failure to take RMD: 25% excise tax on the shortfall
- Reduced to 10% if corrected within 2 years (SECURE 2.0)
RMD Exemptions
- Roth IRAs: No RMDs during the owner's lifetime
- Roth 401(k): Also exempt from RMDs starting 2024 (SECURE 2.0)
- Still-working exception: If you're still employed at age 73 and don't own 5%+ of the company, you can delay RMDs from your current employer's plan (but not from IRAs)
Exam Tip: Gotchas
- RMDs cannot be rolled over. They must be distributed and included in taxable income for the year.
- Delaying the first RMD to April 1 means two distributions in one year. One by April 1, another by December 31. This can push the participant into a higher tax bracket.
- Roth IRAs have no lifetime RMDs, but Roth 401(k)s were subject to RMDs until 2024. Starting in 2024, Roth 401(k)s are also exempt (SECURE 2.0).
Early Distribution Penalty and Exceptions
Distributions before age 59-1/2 are generally subject to a 10% additional tax on top of ordinary income tax.
Exceptions to the 10% Penalty
| Exception | IRA | Employer Plan |
|---|---|---|
| Death or disability | Yes | Yes |
| Substantially equal periodic payments (SEPP/72(t)) | Yes | Yes |
| Separation from service at age 55+ | No | Yes |
| Qualified medical expenses (>7.5% of adjusted gross income (AGI)) | Yes | Yes |
| Health insurance premiums while unemployed | Yes | No |
| Higher education expenses | Yes | No |
| First-time home purchase (up to $10,000) | Yes | No |
| IRS levy | Yes | Yes |
| Qualified reservist distributions | Yes | Yes |
Exam Tip: Gotchas
- The age-55 separation exception applies ONLY to employer-sponsored plans (401(k), 403(b)), NOT to IRAs. If a 56-year-old leaves their job and takes money from their 401(k), no 10% penalty. If they take money from their IRA, the 10% penalty applies unless another exception is met.
- 457(b) plans have NO 10% early withdrawal penalty. This is a separate rule from the general early distribution penalty. 457(b) distributions are often confused with 401(k) or IRA distributions on the exam.
- First-time home purchase and higher education exceptions apply only to IRAs, not employer plans. The table above shows which exceptions apply where.