Expanded IRA Rollover Rules
Revised By: Elizabeth Silvestri, CFP^®
The Henssler Financial Group Position Paper

The Economic Growth and Tax Relief Reconciliation Act of 2001 included provisions that should simplify many investors' retirement accounts, and possibly decrease the number of separate accounts needed.

What Was the Old Rule?
Based on the old rules, if an employee leaves a job in which he has made 401(k) or 403(b) contributions, the employee could roll the funds over to an IRA Rollover (IRA/RO) account after he or she terminates employment. Most financial advisers, including our firm, previously recommended keeping rollover funds in a separate account if the person believes they may wish to roll the funds into another retirement plan at some point in the future. Based on the old law, if IRA/RO funds were commingled with traditional IRA funds, they could not be rolled into another qualified plan.

What Is the New (as of January 1, 2002) Rule?
Beginning in January 2002, distributions from an IRA account may be rolled over to a qualified plan, tax-sheltered annuity or deferred compensation plan to the extent the amount received is includible in income. This means that after-tax contributions to IRA accounts cannot be rolled over to those types of plans. It no longer matters whether the rollover is coming from an IRA or an IRA/RO. This also means that IRA and IRA/RO funds can be commingled after January 1, 2002.

Who Is Affected by This Rule Change?
If you have left a previous job, rolled 401(k) or 403(b) funds into an IRA/RO account, but kept that account separate from your traditional IRA account, you are affected. Why? This affects you because you no longer need two separate accounts for traditional IRA and IRA/RO funds. Most of us like to have as few accounts as possible, as it decreases the amount of mail received and may even cut down on trading costs. Trading costs may drop because with fewer accounts, fewer separate trades are necessary.

What About After-Tax Contributions?
After-tax contributions to 401(k) and 403(b) plans can be rolled over into IRA accounts. These contributions are treated thereafter as after-tax contributions in an IRA account. However, after-tax traditional IRA contributions cannot be rolled over into 401(k) or 403(b) plans.

What About SIMPLE IRAs?
Amounts distributed from SIMPLE IRAs can be rolled over to a traditional IRA once the employee has participated in the SIMPLE plan for two years. Until two years have passed, SIMPLE IRA distributions can only be rolled over into other SIMPLE IRAs.

What About Roth IRAs?
Roth IRAs are not affected in any way by these changes.

Bottom Line:
Although the rules are not as simple as they could be, these changes should eliminate the need, in most cases, to keep IRA Rollover and traditional IRA accounts separate. These rules took effect on January 1, 2002, allowing investors to combine IRA and IRA/RO accounts. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.