Taxation of Rollovers
When you roll funds from one plan to another, this is considered a distribution and is reported on your tax return for the year the distribution is made. However, rollover distributions will not be taxed if you complete your rollover correctly, either directly or indirectly.
Indirect Rollover (60-Day Rollover)
An indirect rollover is the transfer of all or a portion of your account to you personally and then to either an Individual Retirement Account (IRA) or another employer's retirement plan. You need to complete the transfer of the full amount distributed to you to the new retirement plan within 60 days, or the transfer will be reported as a distribution of your account and be subject to federal income tax, and a 10% early distribution fee if you are under the age of 59 ½ . Under certain circumstances, all or a portion of a distribution (such as a hardship distribution) may not qualify for this rollover treatment.
Most indirect rollover distributions will be subject to a mandatory federal income tax withholding of 20%. This will reduce the amount you actually receive from the rollover distribution. You will then need to provide the equivalent of the 20% withheld to your new retirement account out of your own pocket in order to transfer the full amount of the indirect rollover distribution that you received. This will ensure that you don't pay income taxes on the indirect rollover distribution.
You can also request that a direct rollover, also known as a direct transfer, of all or a portion of your account be made to either an Individual Retirement Account (IRA) or another employer's retirement plan willing to accept the transfer. A direct transfer will result in no tax due until you withdraw funds from the IRA or other employer plan. Like an indirect rollover, under certain circumstances all or a portion of the amount to be distributed may not qualify for this direct transfer.
Should you receive a distribution that is eligible for a rollover, Guideline will provide a more detailed explanation of these options. However, the rules which determine whether or not you qualify for favorable tax treatment are very complex, and you should consult with a qualified tax attorney before making any choices in this regard.