Rollover Your Retirement Funds

Perhaps you have changed jobs. Maybe your old 401 k isn’t reaching its potential or it’s overly invested in one company. If you find another job with a company offering a 401 k or similar plan, just roll the money over into the new plan (but be careful how you do this). If your new employer does not have a 401 k, 403 b or other retirement plan, you can roll over your money into a IRA account.

Whatever your situation, rolling over your retirement accounts allows you to easily consolidate your investments into a diverse, professionally managed portfolio. Either way, you can continue to invest tax-deferred.

What is a Rollover?

A Rollover is the process of moving your retirement account with a previous employer into an Individual Retirement Account (IRA). Rolling over to an IRA allows you to keep your account tax-deferred and actively manage your retirement savings.

A tax-deferred retirement account rollover occurs when you withdraw cash or assets from one retirement plan (401 k or 403 b) and deposit the funds into another eligible retirement plan within 60 days. When handled correctly, a rollover is the best way to move money between retirement accounts without tax penalties; however, if you do not handle the process correctly it can be very costly.

2 Types of Retirement Fund Rollovers

  1. Payout: Your current retirement savings is distributed in a check made payable to you and you deposit the money in a personal account, and then pay it to the custodian of your rollover account within 60 days. This can be similar to a distribution or withdrawal of funds, which may trigger a tax penalty
  2. Direct Rollover: The funds are immediately made payable to the custodian of your retirement account and there are no tax penalties.

Rollover These Retirement Plans

There are several types of qualified retirement plans which can be rolled over into an IRA:

  • 401 k – The common retirement fund offered by employers
  • 457 b – Retirement fund offered to local and state government workers
  • 403 b – Retirement fund offered to public educators and various non-profit employees
  • Thrift Savings Plans (TSP) – Retirement funds for U.S. government employees
  • Other account types may also be accepted (ask your retirement fund manager or financial advisor about which account are qualified)

Does It Cost to Rollover Retirement Funds

Many financial institutions do not charge account holders to transfer money between retirement accounts, however there are a few financial institution that charge fees for rollovers.

How to Rollover Your Retirement Funds

As soon as you leave a job or prepare to leave, the first step to rolling over eligible retirement funds is to request a distribution form from your employer or fund manager. You and your trusted financial advisor will want to consider whether an IRA or a new employer plan (401 k, 403 b, etc) is the best place to grow your retirement money.

Choosing the Best Account to Roll Your Money Into

An IRA always gives you more control over your money and usually has many more investment options and flexibility compared to a typical employer-based account. You can leave the money in the IRA for the long-term or roll it over again into most employer plans once you are eligible to participate. You may also leave those funds rolled over in an IRA and still contribute to a new employer plan — it is advisable to have multiple retirement accounts as long as you do not exceed the allowable contribution limits each year.

If you have an employer-based plan, always contribute to it first, before sending money to an IRA, especially if you employer offers to match your contributions, because those funds are an instant return on your investment.

Avoid Early Withdrawal Penalties

Many people are penalized for withdrawing funds from a retirement account before reaching the official retirement age of 59½. These ‘non-qualified withdrawals’ may be subject to income tax in addition to a 10% early withdrawal penalty.

A direct rollover of retirement funds may allow you to maintain the tax-deferred status of the funds. Even though a direct rollover is not a taxable event nor does it trigger a withholding penalty, but you still have to report it on your federal income tax return.

When you take ask to have you rollover funds distributed in your name, it is always subject to mandatory federal income tax of 20%, even if you intend to rollover the funds within the 60 day time period.

For example: If you have $10,000 in your 401k and do not have another employer-based account to transfer the funds to, you could opt to have the funds distributed to you in a check. However, when you receive the check, it will only be authorized for $8,000. $2,000, of your $10,000 account balance automatically got shipped off to the government to pay your federal income taxes, even if you plan to complete a rollover within the allowable 60 day period.

Don’t Miss Rollover Deadlines

A direct rollover can also prevent you from being subject to mandatory tax withholding for early withdrawal of retirement funds if you happen to miss the 60 day deadline for completing the transaction. If you miss the deadline, the money is considered income, which means you are subject to income tax and an early withdrawal penalty, so a direct rollover save you from potential tax liabilities.

Review Your Retirement Rollover with a trusted Financial Planner

If you ever have questions rolling over your retirement funds from one account to another, it is important to get advice from a trusted retirement planner or financial advisor. They can walk you through the process to make sure you avoid fees, penalties and/or taxes. Look for someone who understands your current situation and financial objectives.

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