Since an IRA is a retirement savings plan that’s traditionally taken from your check before taxes are applied, any time that you’re transferring funds, you’ll want to take into consideration whether or not there will be any IRA rollover tax applied. The answer is that, in most cases, there isn’t an IRA tax if you choose to rollover your funds into a qualified plan and you go with a direct transfer. This is good news for you, but there are some things that you’ll need to do in order to make sure that you don’t end up paying unnecessary IRA rollover taxes.

For example, if you want to complete an IRA rollover from a Simple IRA to a traditional IRA, then there shouldn’t be a problem with taxes.  However, if you choose to do an indirect rollover to move your funds between accounts, you may be subjected to an IRA tax.  The reason for this is that in an indirect transfer, the funds are issued to your personally in check form, instead of being transferred directly between banks.  In order to make sure that you don’t take off with the money and not pay the taxes on it, 20% of the total funds in your account will be withheld for the IRS.

In this situation, you have 60 days from the time that the check was issued to find a new IRA account and deposit the funds into it before the remaining 20% will be released to your new account.  If you don’t make the deposit within the two month time limit, the funds will be turned over to the IRS – not released into your new IRA.  In addition to the taxes you pay on this transfer, the funds in your new traditional IRA will be taxed again when they’re taken out in retirement, leading to double taxation.

In order to avoid this IRA rollover tax situation, you’ll want to speak with your banking institution or financial advisor to ensure that they set up a direct transfer.  This means that the money will never technically be removed from a qualified IRA account, so no IRA tax will be applied to the funds.  This is usually the option that most people select in order to protect themselves from paying any unnecessary IRA taxes.

The only time that you might face a problem with taxation in a direct rollover is with the Roth IRA tax – specifically, when you’re transferring money from a traditional IRA into a Roth IRA.  In a Roth IRA, the money that’s in the account was placed there after taxes were applied, while in a traditional IRA, the money has never been taxed.  So, if you’re rolling your funds from a traditional IRA to a Roth account, a Roth IRA tax will be applied to convert the funds to after-tax monies.

Although this may seem like an unnecessary Roth IRA tax penalty, it can carry some advantages, as the money can be withdrawn tax-free later in life.  If you anticipate taxes going up in the future or suspect that you may be in a higher tax bracket upon retirement, this may be something you will want to discuss further with your financial advisor.