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From 401(k) to IRA. Is this a rollover or a transfer?

Last Updated April 15, 2011

Question: 

I recently took a distribution from my 401(k) account and the amount was rolled over to my traditional IRA. I now want to take a distribution from the IRA and rollover the amount within 60-days. This would be my first distribution from this IRA. However, I am receiving conflicting information about two things. I am being told that the distribution from my 401(k) account to my IRA is a rollover and I am also being told it is a transfer. I am also being told that since I rolled over the contribution to my traditional IRA within the last month, I cannot do a distribution and rollover of that IRA money until next year because of a once-per year rule for rollovers. What is the correct answer?

Answer: 

Confusion between what is a rollover and what is a transfer is a common occurrence.  And, the related official guidance and tax laws sometimes lend to the confusion as they sometimes use the word ‘trustee-to-trustee-transfer’ when referring to direct-rollovers , and other reportable transactions where the assets are moved directly between two financial institutions or two retirement accounts. Financial institutions typically use the term rollover, when referring to distributions (reportable on IRS Form 1099-R) that are credited to eligible retirement accounts as rollover contributions, and they usually use the term ‘transfer’ when referring to non-reportable movement of assets between retirement accounts.

 
The person who told you about the once-per 12-month rule was likely referring to the rule that applies to distributions and rollover contributions that occur between between traditional and SEP IRAs, between SIMPLE IRAs, between Roth IRAs, and from SIMPLE IRAs to traditional IRAs or SEP IRAs. Under this rule, an individual who rolls-over a distribution from an IRA may generally not rollover another distribution from that IRA during the next 12 months. The 12-month period begins on the day the IRA owner receives the distribution. [IRC Sec. 408(d)(3)(B)]. Additional information about limitations on rollovers between IRAs is available in IRS Publication 590, available at www.irs.gov.
Movement of assets from your qualified plan to your IRA is always a distribution from the qualified plan and a rollover contribution to the IRA. This rollover can be a direct rollover, or an indirect rollover which is subject to the 60-day rule. A rollover from your 401(k), any other qualified plan account, 403(b) account or 457(b) plan to your IRA is not subject to the once per 12-month (1-year) rule, and it does not affect the once per 12-month rule for rollover contributions between your IRAs.
 
 
As such, if you take a distribution from your IRA now, the amount is eligible to be rolled over within 60-days

 

This question was answered by Denise Appleby , CEO of Appleby Retirement Consulting Inc. Appleby Retirement Consulting Inc  provides products and service for retirement accounts, to financial , tax and legal professionals.