Forbes has published an article, “Be Sure Your IRA Rollover Is Tax Free”, which discusses how a rollover done correctly is tax free.. The article begins as follows:
Though the rollover is the most frequent IRA transaction, most people do only a few rollovers during their lifetimes. Because of this inexperience, mistakes are made and people pay unnecessary taxes and penalties on their retirement nest eggs.
There are more than 30 types of rollovers, though taxpayers often know them by different names. A conversion of a traditional IRA to a Roth IRA, for example, is a rollover.
A rollover done correctly is tax free.
But an attempted rollover done incorrectly usually is included in gross income and taxed as ordinary income, except for any portion that was after-tax or nondeductible contributions. There also might be a 10% early distribution penalty added if you’re under age 59½. Plus, there could be a 6% penalty for making an excess contribution to an IRA.
Posted by Anthony Tran, Associate Editor, Wealth Strategies Journal