If you roll over an IRA within 60 days of receiving a distribution from an old retirement account, no taxes will be due; but be mindful of several key rules you must abide by in doing so.
Avoid making multiple indirect IRA rollovers per year as this could incur additional taxes and penalties.
Direct rollover
For moving money between IRAs or retirement accounts, direct rollover is often the best solution. Your assets will move directly from one institution to the other without going through your hands (or those of the IRS). Assume you work for Acme Bank and wish to transfer funds from your 401(k) account into Thrivent Mutual Funds in your traditional IRA. IRA administrators for both accounts will exchange documents electronically or your 401(k) administrator will send you a check payable to Thrivent so you never take possession of these assets in any form; consequently, this transfer doesn’t need to be reported to the IRS and included on your income tax return.
Direct Rollovers: A Guide
If you want to do a direct rollover, contact your employer plan administrator and request a distribution form. Complete it and submit it with information on the new IRA you wish to open; be aware that some plans allow for you to select different investments or even change current holdings within an account; they may even waive tax withholding, which typically represents 20% of distribution amounts.
Indirect Rollovers: A Guide
An indirect rollover occurs when you receive a distribution from your retirement account and deposit it directly into another retirement account. This is one of the more prevalent types of rollovers; your current retirement provider sends you a check for the entire balance plus an amount to cover taxes; deposit this payment into your destination account within 60 days or face incurring an early withdrawal penalty of 10%.
Indirect rollovers provide another method of moving funds between workplace retirement plans and individual retirement accounts (IRAs). Here, your plan administrator distributes you a check for the total balance minus 20% withholding for federal taxes; any time later on you may reclaim this withholding by filing your tax return and claiming it back.
Rollovers from most employer-sponsored plans to most IRAs can be done directly or indirectly; it’s important to consider all aspects of both plans before making your decision. An Individual Retirement Account, or IRA, offers more investments with lower fees; however, some features of employer-sponsored plans such as loan options, creditor protections and minimum distribution requirements do not exist in an IRA. Before making your final decision, consult a financial professional in order to gain a full picture of all available options. Should you choose to roll over your retirement savings, the process may be complex. As with any transition, successfully rolling over retirement savings into an IRA requires careful coordination and attention to deadlines and paperwork. But with careful management you can successfully rollover your retirement savings without incurring unnecessary taxes and penalties, freeing you to focus on building your future instead. For easier monitoring use an online IRA; or consider opening an account with a robo-advisor who offer low fees with customized investment guidance.
