Rollovers from one Individual Retirement Account (IRA) to another are generally not subject to immediate taxation if done correctly. However, it’s essential to understand the rules and guidelines to ensure you handle the rollover appropriately. Here are some key points regarding the taxation of IRA rollovers:

  1. Direct Rollovers: If you perform a direct rollover, where the funds are transferred directly from one IRA custodian to another, there are no tax consequences. The money is not considered a distribution, and it’s not included in your taxable income.
  2. Indirect Rollovers: In an indirect rollover, you receive the funds from your IRA and then have 60 days to deposit them into another IRA. To avoid taxes and penalties, you must complete the rollover within this 60-day window. However, starting from January 1, 2015, the IRS implemented a once-per-year rule for indirect rollovers. Under this rule, you can only do one indirect rollover in a 12-month period, regardless of how many IRAs you have.
  3. Roth Conversions: If you’re performing a rollover from a Traditional IRA to a Roth IRA, it is known as a Roth conversion. In this case, the rollover is subject to income tax in the year of conversion. The amount converted is added to your taxable income for that year, which could potentially increase your tax liability.
  4. Required Minimum Distributions (RMDs): Once you reach the age of 72 (or 70½ if you attained that age before January 1, 2020), you must start taking RMDs from your Traditional IRA. Rollovers are not considered RMDs and do not satisfy your distribution requirement. Failure to take the RMD amount can result in penalties.