• The Internal Revenue Service (IRS) has developed a specific set of rules regarding distributions from Individual Retirement Accounts (IRAs), including IRA rollovers. Investors must be aware of the tax ramifications involved in taking any distributions from retirement accounts, and of the importance of following IRS regulations to the letter. In addition to regular income taxation, the IRS may impose tax penalties on certain IRA distributions.
  
  

Distribution Rules During Rollover

• A rollover, for IRS purposes, occurs when you withdraw money from one retirement plan and deposit it in another within a 60-day period. If your rollover is handled electronically, as is often the case in a 401k to IRA rollover, then there is no tax consequence. However, if you physically receive your money before you complete your rollover, the distributing plan administrator is required to withhold 20 percent of your distribution for tax purposes. If you neglect to redeposit the funds within the 60-day window, the rollover is considered a fully taxable distribution.
  
  

Distribution Rules After Rollover

• After a rollover, an IRA is treated the same as any other IRA, at least for tax purposes. As with any other traditional IRA account, any distribution is treated as ordinary income, and taxed accordingly, even if the income was achieved as a capital gain. Mandatory distributions are required annually upon an IRA owner reaching age 70 1/2, and distributions received "prematurely," or before an owner reaches 59 1/2, are assessed an additional 10 percent tax penalty. Further rollovers can be taken once per year, and as long as they are deposited in a retirement account within the 60-day window, there is no tax consequence.
  
  

Special Circumstances and Rollovers

• One quirk in rollover distribution rules allows you to take a 60-day loan from your IRA account once a year. As IRS rules allow you to take a rollover distribution and deposit it in any qualified retirement plan--even the one that you took it from--you are allowed to withdraw from your IRA once a year without penalty, as long as you return the funds within 60 days. This can be a helpful tool if you have short-term financial needs or investment opportunities but won't have the needed funds for 30 to 60 days. Bear in mind that this is not a sound strategy if you do not have funds arriving shortly, as the short-term "loan" will become a fully taxable distribution if you do not replace it within 60 days.