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Comparison of Payment to You Versus Di- rect Rollover Affected item Result of a payment to you Result of a direct rollover Withholding The payer must withhold 20% of the taxable part. There is no withholding. Additional tax If you are under age 591/2, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that isn’t rolled over. There is no 10% additional tax. See Early Distributions in Pub. 590-B. When to report as income Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid. Any taxable part isn’t income to you until later distributed to you from the IRA. If you decide to roll over any part of a distribution, the direct rollover option will generally be to your advantage. This is because you won’t have 20% withholding or be subject to the 10% additional tax under that option. If you have a lump-sum distribution and don’t plan to roll over any part of it, the distribution may be eligible for spe- cial tax treatment that could lower your tax for the distribu- tion year. In that case, you may want to see Pub. 575 and Form 4972, Tax on Lump-Sum Distributions, and its in- structions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods. You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over all or part of the distribu- tion. However, if you roll over any part of the lump-sum distribution, you can’t use the Form 4972 special tax treat- ment for any part of the distribution. Contributions you made to your employer's plan. You can roll over a distribution of voluntary deductible em- ployee contributions (DECs) you made to your employer's plan. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These aren’t the same as an employee's elective contributions to a 401(k) plan, which aren’t deductible by the employee. If you receive a distribution from your employer's quali- fied plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distri- bution. No waiting period between rollovers. The once-a-year limit on IRA-to-IRA rollovers doesn’t apply to eligible roll- over distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year. IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan, you can roll over Table 1-5. TIP part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds won’t be eligible for any optional tax treatment for which it might have otherwise qualified. Property and cash received in a distribution. If you receive both property and cash in an eligible rollover dis- tribution, you can roll over part or all of the property, part or all of the cash, or any combination of the two that you choose. The same property (or sales proceeds) must be rolled over. If you receive property in an eligible rollover distribution from a qualified retirement plan, you can’t keep the property and contribute cash to a traditional IRA in place of the property. You must either roll over the prop- erty or sell it and roll over the proceeds, as explained next. Sale of property received in a distribution from a qualified plan. Instead of rolling over a distribution of property other than cash, you can sell all or part of the property and roll over the amount you receive from the sale (the proceeds) into a traditional IRA. You can’t keep the property and substitute your own funds for property you received. Example. You receive a total distribution from your employer's plan consisting of $10,000 cash and $15,000 worth of property. You decide to keep the property. You can roll over to a traditional IRA the $10,000 cash re- ceived, but you can’t roll over an additional $15,000 repre- senting the value of the property you choose not to sell. Treatment of gain or loss. If you sell the distributed property and roll over all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds (in- cluding any increase in value) are treated as part of the distribution and aren’t included in your gross income. Example. On September 6, Mike received a lump-sum distribution from his employer's retirement plan of $50,000 in cash and $50,000 in stock. The stock wasn’t stock of his employer. On September 24, he sold the stock for $60,000. On October 6, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). Mike doesn’t include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into a traditional IRA. Note. Special rules may apply to distributions of em- ployer securities. For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Pub. 575. Partial rollover. If you received both cash and property, or just property, but didn’t roll over the entire distribution, see Rollovers in Pub. 575. Page 26 Chapter 1 Traditional IRAs