When rolling over retirement assets, it’s essential to choose an institution with low fees and a range of investment options that offers low costs – in particular the 60-day rule and same property rules for IRA rollovers.
Direct trustee-to-trustee rollover is considered the optimal approach, as this reduces errors and delays.
Taxes
Internal Revenue Service (IRS) regulations for rolling over retirement accounts have specific rules. These apply regardless of whether or not you’re switching between two distinct retirement accounts or between an employer-sponsored plan and an IRA. When receiving distributions from your plan, eligible rollovers usually occur when funds are transferred within 60 days – otherwise taxes and an early withdrawal penalty may apply.
If you’re moving from a workplace retirement plan to an IRA, there are multiple methods of doing so. One is direct transfer between custodians; this approach avoids tax complications while being quick and simple.
As another alternative, an indirect rollover involves withdrawing funds and depositing them directly into an IRA. When this occurs, your financial institution will withhold 20% for federal taxes but you have 60 days to make up this withholding and avoid an early withdrawal penalty of 10%.
Investment options
Sometimes a partial rollover may be the optimal strategy. For instance, if your former employer’s plan offers specific investments you would like to retain as part of your asset allocation strategy, it might make more sense to leave those assets with your old employer while rolling over any surplus to an IRA with more comprehensive investment choices.
If you need advice about what to do with old retirement accounts, seek the guidance of an independent legal or financial professional. All investments involve risk.
Indirect IRA rollovers allow you to deposit distributions directly into an IRA without income taxes being withheld, but must be done so within 60 days or you will incur an early distribution penalty of 10%. You may also roll them over into another pre-tax retirement account such as traditional or Roth IRA; trustee-to-trustee transfers may help avoid the 60 day rule altogether.
Fees
Before choosing where to roll over your IRA, it’s essential that you consider all fees associated with the new account. Fees associated with money transfer and investing may add up quickly – be mindful when making this decision!
Some retirement accounts don’t charge fees at all while others do incur significant ones. You should also consider whether your new account requires a high minimum balance or has low contribution limits before opening one.
Before making a rollover decision, it’s essential that you understand the rules of your employer-sponsored plan. Some plans may require an all-or-nothing approach while others may withhold tax from your distributions – always contact the plan administrator for specifics. With an indirect rollover option, the financial institution distributing your funds will withhold 20% from each distribution to cover taxes; you must deposit this withheld amount within 60 days or it will become taxable income and subject to penalties of 10% early withdrawal penalties.
Required minimum distributions
As part of any transfer or partial rollover of an IRA account, required minimum distributions still apply. According to IRS requirements, individuals are expected to withdraw the required minimum distribution from all retirement accounts beginning at age 70 1/2 – including both pre-tax accounts like 401(k)s as well as post-tax ones like Traditional and Roth IRAs.
Withdrawing cash IRA assets may trigger taxes on pretax contributions and earnings as well as a 10% penalty if you are under 59 1/2. To avoid this tax burden, either do a direct rollover or use trustee-to-trustee transfer.
Direct Rollover If you opt for this method, the financial institution that receives your distribution will make a check payable directly to your IRA or retirement account. While this method eliminates taxes being withheld from your distributions, it could take up to 60 days and increases the risk of funds going astray if not deposited within 60 days.
