Rollover Rules Between Different Plan Types

In general, retirement plan sponsors can accept rollovers from individual retirement accounts (IRAs) and other qualified retirement accounts, according to Larry Steinberg, chief investment officer at Financial Architects, Inc and an investment adviser at Claraphi Advisory Network, LLC. Likewise, sponsors of qualified retirement plans generally can permit participants to move money from their plan into an IRA or another qualified plan.

However, there are special considerations for rolling over Roth IRAs or Roth accounts in 401(k), 403(b) and 457(b) plans. And, there are special rules for rolling funds out of or into SIMPLE IRAs.

Details about rollover rules can be seen in the IRS’ rollover chart. Also, certain types of distributions are not eligible for a rollover.

“However, what a specific plan can accept or roll over to will be determined by what is in that specific plan’s plan document,” Steinberg says. Retirement plans are not required to accept rollovers.

Before accepting a rollover from another qualified plan, plan sponsors need to ensure that the money is, indeed, coming from another qualified plan, says Diana Jordan, senior retirement plan consultant at Unified Trust. “Each rollover request situation could be different and may require different steps to determine the validity of the rollover contribution,” she says.

“An easy way to do this is to go to the Department of Labor’s website where all Form 5500s are filed, www.efast@dol.gov,” according to Jordan. “The rollover check could also include a stub or statement with the plan name and source of the funds.”

As well, sponsors need to ensure, according to the plan document, that the participant is eligible to participant in the plan before accepting rollover money. “Many plans have a 30-, 60- or 90-day waiting period,” Jordan notes.

The possible issue with this is that IRS rules require participants to invest money that is being rolled over to a qualified plan or an IRA within 60 days, says Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Services. If the participant fails to invest the money within that time frame, “the IRS deems that to be a nonqualified distribution, which it will tax at ordinary income rates and subject a participant younger than the age of 59-1/2 to the 10% early excise penalty,” says Brett Tharp, CFP senior financial planning analyst at eMoney Advisor.

Edelman says that instead of issuing a rollover check directly to participants, a best practice is for sponsors to advise participants to conduct a transfer, whereby the money is sent directly from the old recordkeeper to the new recordkeeper. This elimates the danger that the participant won’t meet the rollover deadline.

Plan sponsors also need to be aware that if a participant is rolling money over from a regular IRA or qualified plan account to a Roth IRA or Roth retirement plan account, he will need to have the money to pay the state and federal taxes. This is something that sponsors should educate participants about, Steinberg says.

Edelman says his firm is not a proponent of converting money to a Roth account for this very reason. “When you convert to a Roth account, you are going to have to pay taxes immediately on the full value of the account, and that seldom serves participants’ best interests,” he says.

The IRS chart does not include 401(a) plans. Rollovers are permitted from 401(a) plans to a qualified plan.

And, rollovers are permitted to and from 403(b) plans not subject to the Employee Retirement Income Security Act (ERISA)—as long as the plan document allows it.