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What Are the IRA Rollover Limits?

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A couple looking at the IRA rollover limits to decide what to do with their 401(k)

Understanding the limits imposed by the Internal Revenue Service (IRS) on IRA rollovers might be a crucial aspect of financial planning if you rely heavily on IRA funds for retirement. An IRA rollover limit refers to the maximum amount of money that one can transfer from a 401(k) or other employer-sponsored retirement plan into an IRA per year. It can also refer to the number of rollovers you can do from the same IRA account per year. Understanding these rules can help you protect your retirement. You can also talk to a financial advisor who can use their expertise to help protect your money for retirement. 

What Is a Rollover IRA? 

A rollover IRA is a retirement account that allows you to transfer funds from your old employer-sponsored retirement plan, like a 401(k) or 403(b), into an IRA. The primary benefit of a rollover IRA is that it maintains the tax-deferred status of your retirement assets, which means you won’t be paying current income taxes or early withdrawal penalties at the time of the transfer. 

Consider a scenario where you’re transitioning between jobs and you have a decent amount stashed in your previous employer’s 401(k) plan. If you were to cash this out, you’d face significant taxes and penalties. However, by transferring these funds into a rollover IRA, you can not only avoid these penalties but also retain greater control over your savings given the broader range of investment options offered by IRAs compared to employer-sponsored plans. 

The ‘One-Per-Year’ IRA Rollover Rule

Here’s a common misunderstanding – the IRS does not limit the amount of money that you can roll over from your 401(k) to an IRA. However, they do have a rule, often referred to as the “one-per-year” rule, that applies to IRA-to-IRA rollovers. This rule allows for only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. 

This limit may become relevant when you’re consolidating multiple IRA accounts. If you have affected an IRA-to-IRA rollover within the past 12 months, you would need to wait before consolidating another IRA. Failure to abide by these rules may lead to taxes and penalties, which, in turn, can take a bite out of your retirement savings. Navigating these complex rules can be daunting and that’s where a financial advisor can provide much-needed guidance to help you comply.

Options for Your Old 401(k)

Rolling over a 401(k) to an IRA - what are the contribution limits?

When you leave a job, you have several choices for what to do with your old 401(k). One option is to leave it untouched with your former employer. However, this might keep you from exploring better investment options elsewhere and necessitate tracking the 401(k) separately from your other retirement accounts, which can be a potential hassle.

Alternatives include rolling your 401(k) into a new employer’s plan or an IRA. This could afford you more control over your investment choices and ensure that your retirement savings continue to grow tax-deferred. However, it’s important to closely look at any potentially associated fees or issues relating to tax treatment before making such decisions.

An additional option is cashing out your 401(k), which would grant immediate access to your funds. However, this choice comes with a warning: it could lead to taxes and potentially early withdrawal penalties, which could significantly decrease your retirement savings.

How to Complete an IRA Rollover

Completing an IRA rollover involves a multi-step process that starts with opening a new IRA account. Once this account is set up, you need to request a direct rollover from your 401(k) provider. Once the funds are installed in your new IRA, you’re free to choose your investments.

During this process, common pitfalls such as rolling over company stock, missing the 60-day rollover window or unawareness of potential early withdrawal penalties and current income taxes must be avoided. Missteps can result in unnecessary taxes and penalties.

How Much Can You Contribute to an IRA Rollover Each Year?

For 2023, the IRS allows you to contribute up to $6,500 to your IRAs or $7,500 if you’re crossing the 50-year benchmark or already have. Remember, these limits apply to the total contribution to all your IRAs and not to each individual account.

Overcontributing to your IRA can result in a 6% excess contribution penalty, applied annually until the surplus is corrected. Thus, it’s important to be mindful of these limits when planning your contributions. However, instead of focusing solely on the perils of over-contributing, the benefits of continuous, measured contributions to your IRA should be remembered.

Bottom Line

A man looking up the IRA rollover contribution limits.

Understanding the intricacies of an IRA rollover is essential for effective financial planning. From being aware of the rollover limits to understanding your options with old 401(k)s, these elements can significantly impact your retirement savings. Given the complexity of IRA rollovers and the potential for costly slip-ups, seeking professional help from a financial advisor can be extremely beneficial. 

Tips for Retirement

  • There are a lot of considerations when trying to plan out how much you need for retirement and how you should get there. Investors don’t need to worry, though, as you can work with a financial advisor to help you with the entire process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • Consider using a retirement calculator to help you see if you’re on track with your own savings. 

Photo credit: ©iStock.com/LaylaBird, ©iStock.com/designer491, ©iStock.com/Nes

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