Rollovers(p26)

If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can generally defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. You do not include the amount rolled over in your income until you receive it in a distribution from the recipient plan or IRA without rolling over that distribution. (For information about rollovers from traditional IRAs, see chapter 1 of Publication 590.)

If you roll over the distribution to a traditional IRA, you cannot deduct the amount rolled over as an IRA contribution. When you later withdraw it from the IRA, you cannot use the optional methods discussed earlier under Lump-Sum Distributions to figure the tax.

Self-employed individuals are generally treated as employees for the rules on the tax treatment of distributions, including the rules for rollovers.

See Designated Roth accounts, later, for information on rollovers (including in-plan Roth rollovers) related to those accounts. Also, see Rollovers to Roth IRAs, later, for information on rollovers from a qualified retirement plan to a Roth IRA.

For this purpose, the following plans are qualified retirement plans.

• A qualified employee plan.
• A qualified employee annuity.
• A tax-sheltered annuity plan (403(b) plan).
• An eligible state or local government section 457 deferred compensation plan.

An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except:

1. Any of a series of substantially equal distributions paid at least once a year over:
   1. Your lifetime or life expectancy,
   2. The joint lives or life expectancies of you and your beneficiary, or
   3. A period of 10 years or more,
2. A required minimum distribution (discussed later under Tax on Excess Accumulation),
3. Hardship distributions,
4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to these distributions, or of excess annual additions and any allocable gains (see Corrective distributions of excess plan contributions, at the beginning of Taxation of Nonperiodic Payments, earlier),
5. A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan (see Loans Treated as Distributions, earlier),
6. Dividends paid on employer securities, and
7. The cost of life insurance coverage.

In addition, a distribution to the plan participant's beneficiary generally is not treated as an eligible rollover distribution. However, see Qualified domestic relations order (QDRO), Rollover by surviving spouse, and Rollovers by nonspouse beneficiary, later.

You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA.

If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

Any after-tax contributions that you roll over into your traditional IRA, become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606, Nondeductible IRAs, for the year of the distribution. For more information, see the Form 8606 instructions.

If an eligible rollover distribution is paid to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to another qualified retirement plan or to an IRA. However, you can avoid withholding by choosing the direct rollover option, discussed later. Also, see Choosing the right option at the end of this discussion.

An eligible rollover distribution is not subject to withholding to the extent it consists of net unrealized appreciation from employer securities that can be excluded from your gross income. (For a discussion of the tax treatment of a distribution of employer securities, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments, earlier.)

In addition, withholding from an eligible rollover distribution paid to you is not required if:

• The distribution and all previous eligible rollover distributions you received during the tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200, or
• The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA.

There is an automatic rollover requirement for mandatory distributions. A mandatory distribution is a distribution made without your consent and before you reach age 62 or normal retirement age, whichever is later. The automatic rollover requirement applies if the distribution is more than $1,000 and is an eligible rollover distribution. You can choose to have the distribution paid directly to you or rolled over directly to your traditional or Roth IRA or another qualified retirement plan. If you do not make this choice, the plan administrator will automatically roll over the distribution into an IRA of a designated trustee or issuer.

If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. If any part of the eligible rollover distribution is paid to you, the payer must generally withhold 20% of it for income tax.

If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. However, the full amount is treated as distributed to you even though you actually receive only 80%. You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA.

If you are under age 591/2 when a distribution is paid to you, you may have to pay a 10% tax (in addition to the regular income tax) on the taxable part (including any tax withheld) that you do not roll over. See Tax on Early Distributions, later.

If you receive a lump-sum distribution, it may qualify for special tax treatment. See Lump-Sum Distributions, earlier. However, if you roll over any part of the distribution, the part you keep does not qualify for special tax treatment.

You receive an eligible rollover distribution of $10,000 from your employer's qualified employee plan. The payer withholds $2,000, so you actually receive $8,000. If you want to roll over the entire $10,000 to postpone including that amount in your income, you will have to get $2,000 from some other source to add to the $8,000 you actually received.

If you roll over only $8,000, you must include the $2,000 not rolled over in your income for the distribution year. Also, you may be subject to the 10% additional tax on the $2,000 if it was distributed to you before you reached age 591/2.

You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

In the previous example, you received the distribution on June 30, 2011. To postpone including it in your income, you must complete the rollover by August 29, 2011, the 60th day following June 30.

If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended. An amount is a frozen deposit if you cannot withdraw it because of either:

• The bankruptcy or insolvency of the financial institution, or
• A restriction on withdrawals by the state in which the institution is located because of the bankruptcy or insolvency (or threat of it) of one or more financial institutions in the state.

The 60-day rollover period is extended by the period for which the amount is a frozen deposit and does not end earlier than 10 days after the amount is no longer a frozen deposit.

If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA or qualified employer plan. Subsequent distributions of those proceeds, however, do not qualify for the 10-year tax option or capital gain treatment.

If an annuity contract was distributed to you by a qualified retirement plan, you can roll over an amount paid under the contract that is otherwise an eligible rollover distribution. For example, you can roll over a single sum payment you receive upon surrender of the contract to the extent it is taxable and is not a required minimum distribution.

To roll over an eligible rollover distribution of property, you must either roll over the actual property distributed or sell it and roll over the proceeds. You cannot keep the distributed property and roll over cash or other property.

If you sell the distributed property and roll over all the proceeds, no gain or loss is recognized on the sale. The sale proceeds (including any portion representing an increase in value) are treated as part of the distribution and are not included in your gross income.

If you roll over only part of the proceeds, you are taxed on the part you keep. You must allocate the proceeds you keep between the part representing ordinary income from the distribution (its value upon distribution) and the part representing gain or loss from the sale (its change in value from its distribution to its sale).

On September 4, 2010, Paul received an eligible rollover distribution from his employer's noncontributory qualified employee plan of $50,000 in nonemployer stock. On September 24, 2010, he sold the stock for $60,000. On October 3, 2010, he contributed $60,000 cash to a traditional IRA. Paul does not include either the $50,000 eligible rollover distribution or the $10,000 gain from the sale of the stock in his income. The entire $60,000 rolled over will be ordinary income when he withdraws it from his IRA.

The facts are the same as in Example 1, except that Paul sold the stock for $40,000 and contributed $40,000 to the IRA. Paul does not include the $50,000 eligible rollover distribution in his income and does not deduct the $10,000 loss from the sale of the stock. The $40,000 rolled over will be ordinary income when he withdraws it from his IRA.

The facts are the same as in Example 1, except that Paul rolled over only $45,000 of the $60,000 proceeds from the sale of the stock. The $15,000 proceeds he did not roll over includes part of the gain from the stock sale. Paul reports $2,500 ($10,000 ÷ $60,000 × $15,000) as capital gain and $12,500 ($50,000 ÷ $60,000 × $15,000) as ordinary income.

The facts are the same as in Example 2, except that Paul rolled over only $25,000 of the $40,000 proceeds from the sale of the stock. The $15,000 proceeds he did not roll over includes part of the loss from the stock sale. Paul reports $3,750 ($10,000 ÷ $40,000 × $15,000) capital loss and $18,750 ($50,000 ÷ $40,000 × $15,000) ordinary income.

If both cash and property were distributed and you did not roll over the entire distribution, you may designate what part of the rollover is allocable to the cash distribution and what part is allocable to the proceeds from the sale of the distributed property. If the distribution included an amount that is not taxable (other than the net unrealized appreciation in employer securities) as well as an eligible rollover distribution, you may also designate what part of the nontaxable amount is allocable to the cash distribution and what part is allocable to the property. Your designation must be made by the due date for filing your tax return, including extensions. You cannot change your designation after that date. If you do not make a designation on time, the rollover amount or the nontaxable amount must be allocated on a ratable basis.

You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. (See Qualified domestic relations order (QDRO) under General Information, earlier.) If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee.

You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You can roll over the distribution into a qualified retirement plan or a traditional or Roth IRA. For a rollover to a Roth IRA, see Rollovers to Roth IRAs, later.

A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. However, see Rollovers by nonspouse beneficiary next.

If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. For information on inherited IRAs, see Publication 590.

Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, write "Rollover" next to the line.

However, if the distribution was rolled over to a Roth IRA or was an in-plan Roth rollover to a designated Roth account, that you are electing to include in income in 2010, you must report the rollover on Form 8606 and include the amount rolled over in income (other than after-tax amounts) on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. For more information, see Rollovers to Roth IRAs and In-plan Roth rollovers, later.

The administrator of a qualified retirement plan must, within a reasonable period of time before making an eligible rollover distribution, provide you with a written explanation. It must tell you about all of the following.

• Your right to have the distribution paid tax free directly to another qualified retirement plan or to a traditional or Roth IRA.
• The requirement to withhold tax from the distribution if it is not directly rolled over.
• The nontaxability of any part of the distribution that you roll over within 60 days after you receive the distribution.
• Other qualified retirement plan rules that apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.
• How the distribution rules of the plan to which you roll over the distribution may differ from the rules that apply to the plan making the distribution in their restrictions and tax consequences.

The plan administrator must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made. However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as the following two requirements are met.

• You must have the opportunity to consider whether or not you want to make a direct rollover for at least 30 days after the explanation is provided.
• The information you receive must clearly state that you have the right to have 30 days to make a decision.

Contact the plan administrator if you have any questions regarding this information.

Before September 28, 2010, you could only roll over an eligible rollover distribution from a designated Roth account to another designated Roth account or a Roth IRA. If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution (see Direct rollover option, earlier) or you can roll over the entire amount (or any portion) to a Roth IRA. After September 27, 2010, you can roll over amounts from your 401(k) or 403(b) plans to a designated Roth account within the same plan (in-plan Roth rollover). These amounts are generally included in income.

A qualified distribution from a designated Roth account is not includible in income. (A qualified distribution is defined earlier in the discussion of designated Roth accounts under Taxation of Periodic Payments). Generally, you cannot have a qualified distribution within the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. If a direct rollover is made from a designated Roth account under another plan, the 5-tax-year period of participation begins on the first day of your tax year in which you first had designated Roth contributions made to either the account making the distribution or receiving the distribution, whichever was earlier.

If you roll over only part of an eligible rollover distribution that is not a qualified distribution and not paid as a direct rollover contribution, the part rolled over is considered to be first from the income portion of the distribution.

You receive an eligible rollover distribution that is not a qualified distribution from your designated Roth account. The distribution consists of $11,000 (investment) and $3,000 (income earned). Within 60 days of receipt, you roll over $7,000 into a Roth IRA. The $7,000 consists of $3,000 of income and $4,000 of investment. Since you rolled over the part of the distribution that could be included in gross income (income earned), none of the distribution is included in gross income.

After September 27, 2010, if you are a participant in a 401(k) or 403(b) plan, you may be able to roll over amounts from those plans to a designated Roth account within the same plan. Any untaxed amounts included in the in-plan Roth rollover must be included in income. Generally, the amount included in income is included in income in the year you receive the distribution. For 2010 in-plan Roth rollovers, the amount to be included in income is included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010. See Special rules for 2010 in-plan Roth rollovers, later.

To qualify, an in-plan Roth rollover must satisfy the rules for distributions and be an eligible rollover distribution (defined earlier under Eligible rollover distribution). If your plan permits in-plan Roth rollovers, you can roll over any vested amount in your 401(k) or 403(b) plan. After December 31, 2010, in-plan rollovers include governmental section 457(b) plans.

You can make the in-plan Roth rollover by direct transfer of the amount from the non-Roth account to your designated Roth account within the same plan. The 20% mandatory withholding does not apply to in-plan Roth rollovers made by direct rollover. You can also effect the in-plan Roth rollover by receiving an eligible rollover distribution from your 401(k) or 403(b) plan and within 60 days deposit it into a designated Roth account in the same plan.

Your plan must provide a written explanation of the consequences of making an in-plan Roth rollover. In-plan Roth rollovers cannot be undone. Unlike rollovers to Roth IRAs, you cannot later recharacterize an in-plan Roth rollover.

For a 2010 in-plan Roth rollover, any taxable amounts that are required to be included in income are included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010. Form 8606, Part III, is used to report an in-plan Roth rollover for 2010. See Form 8606 and its instructions for more details.

If you make a 2010 in-plan Roth rollover and take a distribution from your designated Roth account in 2010 that is allocable to the in-plan Roth rollover, you may have to include some, or all, of the in-plan Roth rollover in income in 2010. Form 8606, Part IV, is used to figure the amount that you must include in income in 2010. See Form 8606 and its instructions for more details.

You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. However, special rules apply for any amounts rolled over in 2010. See Special rules for 2010 rollovers to Roth IRAs later. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. In addition, the 10% tax on early distributions does not apply.

Any amount rolled over into a Roth IRA is subject to the same rules for converting a traditional IRA into a Roth IRA. For more information, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1 of Publication 590.

For rollovers from qualified employer plans to a Roth IRA in 2010, any amounts that are required to be included in income are included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.

You may be required to include some, or all, of a 2010 rollover from a qualified employer plan to a Roth IRA in income in 2010 if you also take a Roth IRA distribution in 2010. See Form 8606 and its instructions for more information.

You must file Form 8606 with your tax return to report 2010 rollovers from qualified retirement plans (other than designated Roth accounts) to Roth IRAs (unless you recharacterized the entire amount), and to figure the amount to include in income. See the Instructions for Form 8606 for more information.

Table 1 may help you decide which distribution option to choose. Carefully compare the effects of each option.

Affected item	Result of a payment to you	Result of a direct rollover
Withholding	The payer must withhold 20% of the taxable part.	There is no withholding.
Additional tax	If you are under age 591/2, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over.	There is no 10% additional tax. See Tax on Early Distributions, later.
When to report as income	Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid.	Any taxable part is not income to you until later distributed to you from the new plan or IRA. However, see Rollovers to Roth IRAs, earlier, for an exception.

If you are a qualified taxpayer and you received qualified settlement income in connection with the Exxon Valdez litigation, you can contribute all or part of it to an eligible retirement plan. This includes a qualified retirement plan. The amount contributed cannot exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your tax return, not including extensions.

Qualified settlement income that you contribute to a qualified retirement plan will be treated as having been rolled over in a direct trustee-to-trustee transfer within 60 days of the distribution. The amount contributed is not included in your taxable income and it is not considered to be investment in the contract.

You are a qualified taxpayer if you are:

• A plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska), or
• The beneficiary of the estate of a plaintiff who acquired the right to receive qualified settlement income from that plaintiff and who is the spouse or immediate relative of that plaintiff.

Qualified settlement income is any interest or punitive damage awards which are:

• Otherwise includible in income, and
• Received in connection with the Exxon Valdez civil action described (whether pre- or post-judgment and whether related to a settlement or a judgment).

Qualified settlement income can be received as periodic payments or as a lump-sum. See Publication 525, Taxable and Nontaxable Income, for information on how to report Exxon Valdez settlement income.

Qualified settlement income that is contributed to a Roth IRA or a designated Roth account will be:

• Included in your taxable income for the year the qualified settlement income was received, and
• Treated as part of your cost basis (investment in the contract) that is not taxable when distributed.