When an employee leaves a job, or a qualified plan is terminated, a special IRA arrangement - the IRA "rollover" - can be used to hold a qualified plan distribution until it is either transferred into a new qualified retirement plan, or is later distributed to the employee. Tax-sheltered annuity distributions may also be transferred to an IRA rollover. Distributions from an IRC Sec. 457 plan cannot be rolled over to an IRA.

If the distribution is transferred to an IRA rollover account (or another qualified plan) in a direct rollover, no income tax is withheld and the employee avoids current income tax on the distribution.

If the distribution is first paid to the employee before being rolled over (it must be rolled over within 60 days) the plan administrator will withhold 20% of the distribution. In order to roll over the entire distribution and avoid current taxation (and a possible 10% penalty tax on the 20% of the distribution that was withheld)~ the employee will have to make up the 20% withholding from his or her separate finds.

Distributions from a traditional IRA, Roth IRA or SIMPLE IRA are not subject to the 20% tax withholding. However, if the distribution is not rolled to a plan of the same kind within 60 days; the entire distribution is taxable.

Two Options

A. Retain funds in an IRA until age 70½ and then begin distributions.

B. Roll over the funds from the conduit IRA into another qualified plan (if it permits). This will re-qualify the funds for special 5-year        or 10-year averaging as long as no regular IRA contributions have been made to the "conduit" IRA.

Other Considerations

A. Partial distributions can also qualify as "rollover distributions" and be tax deferred.

B. Non-deductible employee contributions cannot be rolled over to the IRA.

C. Non-cash assets which are distributed can be sold and the cash proceeds transferred to the IRA rollover without realizing a current tax on any gain.

D. Amounts received but not rolled over are generally included in taxable income in the year received, and are subject to a 10% penalty tax if the employee is under age 59½. An exception to this 10% penalty applies if a distribution is made as substantially equal periodic payments over the life or life expectancy of the IRA owner, or the joint lives or life expectancies of the IRA owner and a designated beneficiary.¹ The penalty tax is also not imposed in the event of death or disability.

Amounts withheld and remitted as tax withholding are considered as "amounts received."

E. The IRA conduit rollover should be distinguished from a direct transfer. In a direct transfer, the funds the transferred directly from one plan to another without going through a conduit rollover or being distributed to the participant. In this situation, like the conduit rollover, the funds can only go from one plan to a like plan such as qualified plan to qualified plan, IRA to IRA, SIMPLE IRA to SIMPLE IRA, etc.