IRA rollovers and IRA rollover taxes can be very confusing. This is because most rollover IRA accounts have been set up as a way for you to defer taxation on your income, and any time you deal with the money in these accounts, you’ll be left wondering whether or not you’re going to end up owing the IRS money for taxes. Rest assured, though – it is possible to navigate these tricky waters without owing any unnecessary IRA rollover tax.

When you move funds from one IRA account to another, this is known as a rollover.  In essence, you’re taking the money that you’ve already set aside – tax-free – and putting it into another account that’s been set up for your retirement funds.  While it isn’t difficult to complete an IRA rollover, the related tax rules can still be confusing, depending on the way that the money is transferred.

In general, there are two different ways for you to move money between IRA accounts – direct and indirect transfers.  If you opt for a direct transfer, then the money won’t be assessed any IRA rollover taxes or penalties because it’s simply being moved from one retirement account to another without any direct interference.  The notable exception to this rule is transfers that occur from traditional IRAs to Roth IRAs, which are subject to ordinary income tax, due to their unique structures.

Alternatively, if you were to perform an indirect account, the money would be issued to you in the form of a check, and you would have 60 days to deposit it into a new IRA account.  However, this is where the IRA rollover taxes can come into play.  Since the check was issued to you and not to another bank account, a mandatory 20% fine is withheld from the total for taxation.  This is done to make sure that the money goes into another qualified retirement account – not into your pocket!

If you make the deposit within the 60 day time period specified by the IRS, then the remaining 20% will be released to your new IRA account.  If not, it will be used to settle the tax obligation generated by the cash withdrawal from your account.  To avoid these unnecessary complications with IRA tax possibilities, most people opt to go with the direct transfer.

As far as the IRA tax deduction is concerned, be aware that a rollover doesn’t count on your taxes.  Even though there’s technically a large amount of money being placed into your IRA account, it has already been written off on previous years’ taxes, so you can’t claim it again.

In addition, you can’t claim a Roth IRA tax deduction on your annual taxes for contributions rolled into these types of accounts, as the Roth accounts have been set up for monies that have already been taxed.  When you take the money out of the account later in life, you won’t have to pay taxes on it.  Therefore, be aware that you can’t claim an IRA tax deduction on this type of account as well.