Indirect Rollover of Roth IRA
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Indirect Rollover of Roth IRA
I realize trustee-to-trustee transfers are generally preferred, but will the following procedure correctly accomplish an indirect rollover of a Roth IRA to Vanguard? Is anything missing? Will Vanguard end up lacking any useful account records, such as contribution history, that a trustee-to-trustee transfer would retain? What could possibly go wrong?
1. Create new Vanguard Roth IRA, leaving it unfunded for the moment.
2. Move existing Roth IRA balance from current custodian to personal bank account (starts 60-day rollover clock). Current custodian will issue a 1099-R.
3. Within 60 days of Step 2, fund the Vanguard Roth IRA created in Step 1 with an amount exactly equal to the amount removed from the old Roth IRA in Step 2. To ensure the contribution is recognized as a rollover rather than a regular annual contribution, simply select "Yes" next to the question "Is this a rollover from an employer-sponsored plan or IRA?"
Funds may come from any source (e.g. ACH from any linked bank account, move from any taxable Vanguard account, etc.). Vanguard will eventually issue a 5498, which IRS will match with 1099-R generated in Step 2.
4. Report rollover on next tax return.
5. Wait 365 days before attempting another indirect rollover.
1. Create new Vanguard Roth IRA, leaving it unfunded for the moment.
2. Move existing Roth IRA balance from current custodian to personal bank account (starts 60-day rollover clock). Current custodian will issue a 1099-R.
3. Within 60 days of Step 2, fund the Vanguard Roth IRA created in Step 1 with an amount exactly equal to the amount removed from the old Roth IRA in Step 2. To ensure the contribution is recognized as a rollover rather than a regular annual contribution, simply select "Yes" next to the question "Is this a rollover from an employer-sponsored plan or IRA?"
Funds may come from any source (e.g. ACH from any linked bank account, move from any taxable Vanguard account, etc.). Vanguard will eventually issue a 5498, which IRS will match with 1099-R generated in Step 2.
4. Report rollover on next tax return.
5. Wait 365 days before attempting another indirect rollover.
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Re: Indirect Rollover of Roth IRA
Sure, but why?
Re: Indirect Rollover of Roth IRA
I'm guessing you can buy into the new IRA (with other money, of course) on the same day you sell from the old IRA, so you'd avoid being out of the market?
Re: Indirect Rollover of Roth IRA
I think you have the procedure right, but why?
A "rollover" of a Roth IRA can be done "in-kind" as a trustee to trustee transfer from one Roth IRA to another. The money is not out of the market and you don't have to count it as your "one time". I would think that should be your first choice. Is it not available for some reason?
A "rollover" of a Roth IRA can be done "in-kind" as a trustee to trustee transfer from one Roth IRA to another. The money is not out of the market and you don't have to count it as your "one time". I would think that should be your first choice. Is it not available for some reason?
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Re: Indirect Rollover of Roth IRA
This method allows the transfer to happen without requiring any communication between the two custodians, particularly via mail, insecure e-mail, etc. Who's to know how they will choose to send customer personal information? This way, the Roth IRA owner facilitates the entire process online, rather than having to wait for employees at either custodian to intervene. Seems like a very smooth process.
Re: Indirect Rollover of Roth IRA
Hmmm. Interesting reason.
There is no reason I know of not to do what you are considering. And I think you have the procedure right. Good luck!
There is no reason I know of not to do what you are considering. And I think you have the procedure right. Good luck!
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Re: Indirect Rollover of Roth IRA
Can't you do an ACATS transfer?zero_coupon wrote: ↑Sun Jul 03, 2022 4:33 pm This method allows the transfer to happen without requiring any communication between the two custodians, particularly via mail, insecure e-mail, etc. Who's to know how they will choose to send customer personal information? This way, the Roth IRA owner facilitates the entire process online, rather than having to wait for employees at either custodian to intervene. Seems like a very smooth process.
Re: Indirect Rollover of Roth IRA
But as retiredjg stated above, if you make the transfer “in kind” then why do you care how long it takes? You are never out of the market, you own all those securities throughout the process.zero_coupon wrote: ↑Sun Jul 03, 2022 4:33 pm…rather than having to wait for employees at either custodian to intervene.
You only communicate with the new custodian, they have a big incentive to assure that everything goes smoothly. They “pull” the assets from the current custodian.
Strictly speaking the 60 days begins when the assets leave your old custodian, not when they arrive in your bank. If they accidentally send it to the wrong account, the 60 day clock has started. If Fed Ex (or whomever) loses the check, the 60 days can expire even If the funds never reach you. The same on the check you send to Vanguard. You pay taxes on all gains in the account plus a 10% penalty if under 59.5 years old. I would not risk the possible consequences.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Indirect Rollover of Roth IRA
I recall reading that the 60 days begins when you receive the check. I don't know if that is accurate or not, but I've read it more than once.
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Re: Indirect Rollover of Roth IRA
Won’t the existing Roth IRA custodian be obliged to withhold at least 20% of the balance withdrawn for the indirect rollover for Federal income taxes (even though the distribution would ordinarily be tax exempt and might qualify as a rollover and otherwise not be taxable income) and if the OP isn’t 59.5 years old won’t the OP be subject to withdrawal penalties?
Just asking.
https://www.irs.gov/taxtopics/tc413
Just asking.
https://www.irs.gov/taxtopics/tc413
Re: Indirect Rollover of Roth IRA
I believe that is for Employer plans, not Roth IRA to Roth IRA.ChrisC wrote: ↑Sun Jul 03, 2022 5:32 pm Won’t the existing Roth IRA custodian be obliged to withhold at least 20% of the balance withdrawn for the indirect rollover for Federal income taxes (even though the distribution would ordinarily be tax exempt and might qualify as a rollover and otherwise not be taxable income) and if the OP isn’t 59.5 years old won’t the OP be subject to withdrawal penalties?
Just asking.
https://www.irs.gov/taxtopics/tc413
Last edited by David Jay on Sun Jul 03, 2022 5:40 pm, edited 1 time in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Indirect Rollover of Roth IRA
The 20% mandatory withholding is for employer plans (including Roth 401k). A Roth IRA is not an employer plan. No withholding is required to my knowledge.
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Re: Indirect Rollover of Roth IRA
There is no mandatory or default withholding for Roth IRA distributions, but just to play it safe I suggest that withholding be specifically declined when requesting a Roth distribution.
60 day rollovers between like kind IRAs should be avoided wherever possible by using direct transfers. Save the one permitted rollover in 12 months for true emergencies.
60 day rollovers between like kind IRAs should be avoided wherever possible by using direct transfers. Save the one permitted rollover in 12 months for true emergencies.
Re: Indirect Rollover of Roth IRA
I would avoid indirect IRA transfers if it were at all possible due to the possibility of errors or lost checks/payments. I guess if you have standby cash at the ready to fund the receiving account that would address some of the risks.
We recently completed an "in kind" transfer of a traditional IRA account from Schwab to Fidelity and the asset transfer (ETFs, treasuries, and cash) was completed within 7 days.
Other than expecting to have potential use of the funds for up to 60 days the other potential benefit of an indirect transfer could be adding a layer of privacy that precludes the former custodian from knowing where the funds go. I've done this by moving funds from a former employers plan to a mutual fund company and then transferring from there to my preferred brokerage.
We recently completed an "in kind" transfer of a traditional IRA account from Schwab to Fidelity and the asset transfer (ETFs, treasuries, and cash) was completed within 7 days.
Other than expecting to have potential use of the funds for up to 60 days the other potential benefit of an indirect transfer could be adding a layer of privacy that precludes the former custodian from knowing where the funds go. I've done this by moving funds from a former employers plan to a mutual fund company and then transferring from there to my preferred brokerage.
The closest helping hand is at the end of your own arm.
Re: Indirect Rollover of Roth IRA
Actually, withholding of 10% is required per the law. However, the law also allows one to elect to have none withheld. It is important to know this because a 10% withholding will be done if one does not opt out.
https://www.law.cornell.edu/cfr/text/26/1.408A-6
“Q-12. How do the withholding rules under section 3405 apply to Roth IRAs?
A-12. Distributions from a Roth IRA are distributions from an individual retirement plan for purposes of section 3405 and thus are designated distributions unless one of the exceptions in section 3405(e)(1) applies. Pursuant to section 3405(a) and (b), nonperiodic distributions from a Roth IRA are subject to 10-percent withholding by the payor and periodic payments are subject to withholding as if the payments were wages. However, an individual can elect to have no amount withheld in accordance with section 3405(a)(2) and (b)(2).”
Re: Indirect Rollover of Roth IRA
I find this very strange...for something to be required except that one can opt out.
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Re: Indirect Rollover of Roth IRA
Yes, strange indeed. Would most institutions actually withhold this unless one opts out? Is the opt-out option always presented to the withdrawer?
Does anyone have additional notes or cautions to add to the steps listed in the OP?
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Re: Indirect Rollover of Roth IRA
Apparently Vanguard has a simple method (checkbox) for specifying that the contribution is a rollover rather than an annual contribution (see linked post for details):
How does Fidelity allow one to designate a Roth IRA contribution as a rollover? Is there a similar checkbox?
Re: Indirect Rollover of Roth IRA
I think it is safe to assume that financial institutions will follow IRS guidance about withholding and will offer an opt-out option. If you want to find out, go to your account and go through the steps without hitting the "submit" or "complete transaction" button and see exactly what the steps are.zero_coupon wrote: ↑Sun Dec 04, 2022 7:09 amYes, strange indeed. Would most institutions actually withhold this unless one opts out? Is the opt-out option always presented to the withdrawer?
Does anyone have additional notes or cautions to add to the steps listed in the OP?
No cautions about your plan.
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Re: Indirect Rollover of Roth IRA
The problem here is if you do NOT decline Roth IRA withholding it leaves the 10% default withholding up to the Roth custodian's interpretation of whether it is reasonable to believe the distribution should be taxable (included in gross income).
The withholding applies to "designated distributions", but the applicable code Sec 3405(e) follows and lists distributions which are excepted from being "designated":
(
The Roth custodian knows your age and when you first contributed to THEIR Roth account, but that's about all they know for sure, as you might have several other Roth accounts elsewhere. Therefore, most custodians will withhold 10%, and even though they know your age they do not want to spend the time to determine when your first contribution was made. It is easier for them to withhold even though they do not have to in all cases.
The withholding applies to "designated distributions", but the applicable code Sec 3405(e) follows and lists distributions which are excepted from being "designated":
(
As stated in (ii) above, the custodian is given flexibility to determine whether the Roth distribution is treated as includible. The last paragraph above removes that flexibility for non Roth IRAs, but it remains for Roth IRAs.B)Exceptions
The term “designated distribution” shall not include—
(i)any amount which is wages without regard to this section,
(ii)the portion of a distribution or payment which it is reasonable to believe is not includible in gross income, and
(iii)any amount which is subject to withholding under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty, or
(iv)any distribution described in section 404(k)(2).
For purposes of clause (ii), any distribution or payment from or under an individual retirement plan (other than a Roth IRA) shall be treated as includible in gross income.
The Roth custodian knows your age and when you first contributed to THEIR Roth account, but that's about all they know for sure, as you might have several other Roth accounts elsewhere. Therefore, most custodians will withhold 10%, and even though they know your age they do not want to spend the time to determine when your first contribution was made. It is easier for them to withhold even though they do not have to in all cases.
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Re: Indirect Rollover of Roth IRA
Alan, many thanks for the reference. Sounds like it's important to confirm one's preference for NO withholding prior to initiating any transaction. If the custodian withheld 10%, and one subsequently attempted to withdraw the withheld amount and manually transfer it to the new custodian, that would violate the once-per-year rule applicable to indirect rollovers, thus triggering a penalty. One would therefore have to transfer any withheld amount via trustee-to-trustee transfer, or wait a year to do it manually. Is this correct?Alan S. wrote: ↑Sun Dec 04, 2022 12:02 pm The problem here is if you do NOT decline Roth IRA withholding it leaves the 10% default withholding up to the Roth custodian's interpretation of whether it is reasonable to believe the distribution should be taxable (included in gross income).
The withholding applies to "designated distributions", but the applicable code Sec 3405(e) follows and lists distributions which are excepted from being "designated":
(As stated in (ii) above, the custodian is given flexibility to determine whether the Roth distribution is treated as includible. The last paragraph above removes that flexibility for non Roth IRAs, but it remains for Roth IRAs.B)Exceptions
The term “designated distribution” shall not include—
(i)any amount which is wages without regard to this section,
(ii)the portion of a distribution or payment which it is reasonable to believe is not includible in gross income, and
(iii)any amount which is subject to withholding under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty, or
(iv)any distribution described in section 404(k)(2).
For purposes of clause (ii), any distribution or payment from or under an individual retirement plan (other than a Roth IRA) shall be treated as includible in gross income.
The Roth custodian knows your age and when you first contributed to THEIR Roth account, but that's about all they know for sure, as you might have several other Roth accounts elsewhere. Therefore, most custodians will withhold 10%, and even though they know your age they do not want to spend the time to determine when your first contribution was made. It is easier for them to withhold even though they do not have to in all cases.
The OP asked about transferring to Vanguard, but how about transferring to Fidelity? Does Fidelity have an equivalent checkbox?zero_coupon wrote: ↑Sun Dec 04, 2022 7:15 am Apparently Vanguard has a simple method (checkbox) for specifying that the contribution is a rollover rather than an annual contribution (see linked post for details):
How does Fidelity allow one to designate a Roth IRA contribution as a rollover? Is there a similar checkbox?
Re: Indirect Rollover of Roth IRA
Why the concern about institutions sharing limited information for the purposes of a trustee-to-trustee transfer? I think it's more likely for things to go wrong with an indirect rollover with so many moving parts - and you'll end up having to document more things and perform more steps. I could see a point if you wanted use of the money - so it's like using the money as a short-term loan. If that's the true reason, the steps outlined would suffice. But otherwise, in-kind trustee-to-trustee transfers are far superior in every respect.
Re: Indirect Rollover of Roth IRA
My personal preference is trustee to trustee. I never had a problem with it and I’m not out of the market.zero_coupon wrote: ↑Sun Jul 03, 2022 4:33 pm This method allows the transfer to happen without requiring any communication between the two custodians, particularly via mail, insecure e-mail, etc. Who's to know how they will choose to send customer personal information? This way, the Roth IRA owner facilitates the entire process online, rather than having to wait for employees at either custodian to intervene. Seems like a very smooth process.
My DWs employer plan required a check but they mailed it directly to the broker. I had to know that my broker has two mailing addresses: one for regular mail and a different address to accept overnight mail. The process went fine. I never touched the check and nothing was withheld because the check went directly to the broker.
You process will technically work, but I think you open yourself up to potentially more problems.
"I started with nothing and I still have most of it left."
Re: Indirect Rollover of Roth IRA
I just want to reiterate that while the proposed process will work, it simply leaves you open to many more potential problems, mistakes, hiccups, etc. than a direct rollover.
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Re: Indirect Rollover of Roth IRA
Yes, Caduceus, Wiggums, and MrJedi, perhaps it would be wise to use the more "typical" method.
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Re: Indirect Rollover of Roth IRA
Has anyone done this at Fidelity? Is there a checkbox of some sort?zero_coupon wrote: ↑Sun Dec 04, 2022 10:17 pmThe OP asked about transferring to Vanguard, but how about transferring to Fidelity? Does Fidelity have an equivalent checkbox?zero_coupon wrote: ↑Sun Dec 04, 2022 7:15 am Apparently Vanguard has a simple method (checkbox) for specifying that the contribution is a rollover rather than an annual contribution (see linked post for details):
How does Fidelity allow one to designate a Roth IRA contribution as a rollover? Is there a similar checkbox?
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Re: Indirect Rollover of Roth IRA
There is something very simple. I think you make the selection when you pick the type of account you want to open. They give you choices like traditional, Roth or Rollover IRA.zero_coupon wrote: ↑Mon Dec 05, 2022 7:58 amHas anyone done this at Fidelity? Is there a checkbox of some sort?zero_coupon wrote: ↑Sun Dec 04, 2022 10:17 pmThe OP asked about transferring to Vanguard, but how about transferring to Fidelity? Does Fidelity have an equivalent checkbox?zero_coupon wrote: ↑Sun Dec 04, 2022 7:15 am Apparently Vanguard has a simple method (checkbox) for specifying that the contribution is a rollover rather than an annual contribution (see linked post for details):
How does Fidelity allow one to designate a Roth IRA contribution as a rollover? Is there a similar checkbox?
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Re: Indirect Rollover of Roth IRA
I think this process may vary based on the custodians involved. We are wrapping up a transfer of an inherited IRA from TIAA to Fidelity. I opened the account at Fidelity and completed their transfer info. They responded that I needed to contact TIAA and TIAA had me go through their process to have them do a rollover. The TIAA reps were good to work with and it was all done online but it wasn't a process where it was all handled by Fidelity. Looking back, I could have opened the account at Fidelity, NOT given them any info about the transfers, and completed the paperwork at TIAA and had them send the checks since is basically what happened.David Jay wrote: ↑Sun Jul 03, 2022 5:14 pm....You only communicate with the new custodian, they have a big incentive to assure that everything goes smoothly. They “pull” the assets from the current custodian......zero_coupon wrote: ↑Sun Jul 03, 2022 4:33 pm…rather than having to wait for employees at either custodian to intervene.
There were two sub-accounts at TIAA. One account went smoothly and made it to my Fidelity account in a few days. After the other didn't show up for almost two weeks, I called Fidelity and they had the check but hadn't credited the account because they needed to know if it was a rollover or direct transfer so they could code it properly so I had to call TIAA to confirm and then call Fidelity back. I'm wondering how long they had been holding the check and when they would have contacted me. The bad part is that this is fixed income and rates dropped around .5% between the two checks being credited. The good thing is that the bigger check was the one that was handled quickly.
Re: Indirect Rollover of Roth IRA
I believe it is the account owner’s responsibility to keep records of contribution, conversion, and withdrawal history until the account is qualified (age 59.5 AND account is 5 years old). Just suppose a taxpayer did an rollover (indirect or direct) every two or three years. I would expect the history to be messed up or missing somewhere along the line. But, of course, you have saved all your Form 1099-Rs (for money leaving an IRA) and Form 5498s (for money entering an IRA), right?zero_coupon wrote: ↑Sun Jul 03, 2022 3:14 pm Will Vanguard end up lacking any useful account records, such as contribution history, that a trustee-to-trustee transfer would retain?
Where do you see this question? Have you confirmed it works by simulating a rollover at the new custodian, but not hitting the “Submit” button?To ensure the contribution is recognized as a rollover rather than a regular annual contribution, simply select "Yes" next to the question "Is this a rollover from an employer-sponsored plan or IRA?"
And make sure it has been over 365 days since the previous indirect rollover (if any).5. Wait 365 days before attempting another indirect rollover.
It will also be cleaner if the withdrawal and contribution are done in the same calendar year. Starting now may put time delays in the mix due to all kinds of year-end transactions.
But you can create the new Roth IRA now and start making yearly contributions to it.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Indirect Rollover of Roth IRA
The whole thing seems to be predicated on the idea that the custodians will be sloppy and pass critical information by insecure means but I think that's highly unlikely and is a major reason acats was designed to provide an automated secure method for transferring assets.
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Re: Indirect Rollover of Roth IRA
As it seems relatively easy to control the whole process oneself (and perhaps accomplish the task quicker and smoother), I thought that an indirect rollover would be an option worth considering. As others have suggested, however, perhaps this would invite problems.placeholder wrote: ↑Mon Dec 05, 2022 8:20 pm The whole thing seems to be predicated on the idea that the custodians will be sloppy and pass critical information by insecure means...
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Re: Indirect Rollover of Roth IRA
One thing being overlooked is the possible future need to complete an indirect rollover, but you'll have fired your one and only round, and it takes 365 days to reload.
There's also an assumption that the indirect rollover will go perfectly, which is not a sure thing, and that filing taxes will go smoothly, which is not a sure thing.
No question trustee-to-trustee transfers can be long and a bit of a pain, but I'm willing to go through all of that in order to keep my indirect rollover option open should an emergency arise. I don't see an issue with the personal information aspect, but I understand where OP is coming from there.
There's also an assumption that the indirect rollover will go perfectly, which is not a sure thing, and that filing taxes will go smoothly, which is not a sure thing.
No question trustee-to-trustee transfers can be long and a bit of a pain, but I'm willing to go through all of that in order to keep my indirect rollover option open should an emergency arise. I don't see an issue with the personal information aspect, but I understand where OP is coming from there.
Re: Indirect Rollover of Roth IRA
Yea, I think of an indirect rollover as a last resort measure. I've done a number of rollovers where I got a check made out to the destination brokerage "FBO" (for the benefit of) and that isn't indirect, but is more manual for those companies that may be less capable.Lionel Hutz wrote: ↑Tue Dec 06, 2022 11:03 am One thing being overlooked is the possible future need to complete an indirect rollover, but you'll have fired your one and only round, and it takes 365 days to reload.
There's also an assumption that the indirect rollover will go perfectly, which is not a sure thing, and that filing taxes will go smoothly, which is not a sure thing.
No question trustee-to-trustee transfers can be long and a bit of a pain, but I'm willing to go through all of that in order to keep my indirect rollover option open should an emergency arise. I don't see an issue with the personal information aspect, but I understand where OP is coming from there.
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Re: Indirect Rollover of Roth IRA
I would suggest reading up on the acats system.zero_coupon wrote: ↑Tue Dec 06, 2022 5:04 am As it seems relatively easy to control the whole process oneself (and perhaps accomplish the task quicker and smoother), I thought that an indirect rollover would be an option worth considering. As others have suggested, however, perhaps this would invite problems.
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Re: Indirect Rollover of Roth IRA
The custodian's 10% withholding would be sent to Treasury as a tax payment on behalf of the IRA owner. Thus, upon contributing to the new IRA within the allowable 60-day period, one would have to make up for this 10% deficiency with funds from another source. The rollover contribution amount must match the value of the IRA value immediately prior to withdrawal. Upon filing one's tax return, report the rolllover as $0 taxable, then request a refund of the 10% withheld by the custodian.zero_coupon wrote: ↑Sun Dec 04, 2022 10:17 pm If the custodian withheld 10%, and one subsequently attempted to withdraw the withheld amount and manually transfer it to the new custodian, that would violate the once-per-year rule applicable to indirect rollovers, thus triggering a penalty. One would therefore have to transfer any withheld amount via trustee-to-trustee transfer, or wait a year to do it manually. Is this correct?
Is this correct?
Re: Indirect Rollover of Roth IRA
Pretty much correct.
If anything is withheld (try to avoid this by declining withholding) you must make up that amount from another source (such as a savings account) and deposit the entire amount in the new Roth IRA within 60 days to make the rollover "whole". If it is not whole, you will have taken a withdrawal from the Roth IRA and will need to document that on your taxes.
About the refund...you don't request a refund for this money specifically. It is just part of the refund you will get if you have paid more in taxes during the year than is due for the year. If you have not paid enough taxes during the year, the Roth withholding may not be refunded.
If anything is withheld (try to avoid this by declining withholding) you must make up that amount from another source (such as a savings account) and deposit the entire amount in the new Roth IRA within 60 days to make the rollover "whole". If it is not whole, you will have taken a withdrawal from the Roth IRA and will need to document that on your taxes.
About the refund...you don't request a refund for this money specifically. It is just part of the refund you will get if you have paid more in taxes during the year than is due for the year. If you have not paid enough taxes during the year, the Roth withholding may not be refunded.
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