Transfers, Rollovers, and Distribution Rules

Understanding how money moves between retirement accounts, and what happens when it comes out, is essential to advising clients well. This section covers rollovers, required minimum distributions, and the exceptions to the early withdrawal penalty.

Direct Rollover or 60-Day Rollover: What's the Difference?

There are two ways to move money between retirement accounts, and the differences have major tax consequences:

• 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.

Which Accounts Can Roll Into Which?

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.

When Must Required Minimum Distributions (RMDs) Begin?

Once you reach a certain age, the IRS requires you to withdraw a minimum amount from most retirement accounts each year.

What Are the 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)

What Is the Penalty for Missing an RMD?

• Penalty for failure to take RMD: 25% excise tax on the shortfall
• Reduced to 10% if corrected within 2 years (SECURE 2.0)

Which Accounts Are Exempt From RMDs?

• Roth IRAs: No RMDs during the owner's lifetime
• Roth 401(k): Also exempt from RMDs (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 formerly subject to RMDs. Roth 401(k)s are now also exempt (SECURE 2.0).

When Does the Early Distribution Penalty Apply?

Distributions before age 59-1/2 are generally subject to a 10% additional tax on top of ordinary income tax.

What Are the Exceptions to the 10% Penalty?

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 easily confused with 401(k) or IRA distributions.
• Modifying a SEPP schedule before the later of 5 years or age 59-1/2 recaptures the penalty retroactively on every distribution already taken, not just future ones, plus interest for the deferral period. The SEPP row above states the duration requirement; this is the consequence of breaking it.
• First-time home purchase and higher education exceptions apply only to IRAs, not employer plans. The table above shows which exceptions apply where.
• The health insurance exception turns on RECEIVING unemployment compensation for 12+ consecutive weeks, not on being unemployed for 12+ weeks. Someone jobless for 12+ weeks who never collected benefits for that stretch does not qualify. Once qualified, distributions can be taken in the year the compensation was received or the following year, and the exception ends once the individual has been reemployed for 60+ days.

What Should You Check on Exam Day?

• Matched the rollover type to its consequence: direct rollover has no withholding, 60-day rollover triggers 20% mandatory withholding on employer-plan distributions.
• Confirmed a tax-exempt 457(b) cannot roll into an IRA, and a SIMPLE IRA can only roll into another SIMPLE IRA during its first 2 years.
• Applied the age-55 separation exception only to employer plans, never to IRAs; applied first-time-home and higher-education exceptions only to IRAs, never to employer plans.
• Remembered RMDs cannot be rolled over and Roth IRAs (and Roth 401(k)s) have no lifetime RMD requirement.