Retirement planning for most people means saving via employer-sponsored retirement plans like 401(k) accounts, which work great as long as you work for the same employer.
After you move jobs or are fired, you can take money out of your 401(k) retirement plant, but don’t place it in a regular account, since you’ll lose tax benefits and also have to pay withdrawal penalties.
A rollover IRA account allows you to keep your tax-deferred benefits and also manage your investments.
What is a Rollover IRA?
An Individual Retirement Arrangement (IRA) rollover is fund transfer from a retirement account into a traditional IRA or a Roth IRA.
You can transfer the money with a direct transfer or by check.
Why a rollover IRA is a good idea
There are few clear benefits with rollover IRA accounts:
- your 401(k) savings and other employer-sponsored retirement plan accounts can be moved without taxation
- no 10% penalty if you are younger than 59 and a half
- preserves the tax-deferred status from your previous retirement plan
- there are more investment options for you, compared to a 401(k) plan
One of the biggest benefits from rollover IRAs comes from the investment flexibility you’ll get. Your 401(k) has limited investment options, they can get expensive and you are not allowed to buy individual stocks for example.
An IRA allows you to choose lower-cost mutual funds, ETF investments, individual stocks or any other investment opportunities you see fit.
How to open a rollover IRA
Your former employer sends money directly to where you manage your IRA. Just fill in the paperwork with them and it should be easy to transfer. The benefit it that you’ll never have the money in your hands, so you’ll not pay taxes and fees for the rollover money.
You receive a check from your previous employer and have to personally deposit to the financial institution that handles your IRA. You have 2 months (60 days) to deposit it, otherwise it will be treated as a taxable income and you’ll probably pay penalties as well.
An eligible rollover distribution paid directly to you is subject to a mandatory 20 percent federal income tax withholding at the time of the distribution.
Any portion of the distribution to a traditional IRA not rolled over within 60 calendar days may be subject to income taxes and the additional 10 percent penalty tax.
From these 2 options, direct transfers are better, since there are little ‘surprises’ you could have with your retirement funds.
Can I move my funds back to a 401(k)?
When we talk about IRA rollover, we usually think about moving the funds from a 401(k) to an IRA. There is another rollover possible, from an IRA back to a 401(k).
It makes sense to consolidate all your retirement funds back in a 401(k) if the employer-sponsored plan has less fees and a better fund choices.
How Many Rollover or Transfer Transactions Am I Allowed?
You are limited to one IRA distribution rollover during a 12-month period.
This 12-month rule applies to each separate IRA you own and is determined from the date you receive an IRA distribution.
This limit doesn’t apply if the assets are moved from one IRA to another or to distributions from Internal Revenue Code (IRC) Section 401(a), 403(b), or governmental 457(b) plan rolled over to a traditional or Roth IRA.
These are just few of the rollover IRA rules you should know, when retirement planning.