rollover IRA

When you have a retirement benefit plan like a 401(k) in place with one organization and you want to leave it, there are only a few things you can do. First, you can cash out and take the money. The challenge of this is that you may end up paying huge tax penalties to the IRS. You can also leave in your former employer’s 401(k) plan, but this may restrict you from monitoring your account. Next, you can move the money from your current employer’s plan to your new employer’s 401(k) plan. This is a good idea and a considerably easy one but you may be subject to the choices provided by your new employer. Finally, you may choose to open a Rollover IRA with a brokerage firm and have the funds from your old 401(k) deposited into the account. Here, you would continue to enjoy the benefit of tax protection of a qualified retirement account and you will be able to invest in any security available through your broker.

An Individual Retirement Arrangement (IRA) rollover is a transfer of funds from a retirement account into a traditional IRA or a Roth IRA. It is a type of traditional individual retirement account into which employees can transfer assets from their former employer’s retirement plan when they change jobs or retire. A Rollover IRA is an account that acts just like a regular brokerage account except that it is funded by transferring, or “rolling over” money from a retirement plan at an old employer to a new one. In doing this, there is the process that is called a direct rollover and there is the indirect rollover. In order to fully understand and decide whether to leave your 401(k) at a former employer is better than rolling to an IRA and vice versa or understand the impact of you entering into a rollover IRA, here is a rundown of what you need to know about a Rollover IRA.

Definition

As already explained, a rollover is the process of moving your retirement savings from your retirement plan at work (401(k), profit-sharing plan, etc.) into an Individual Retirement Account (IRA). If you receive the proceeds of your 401(k) to invest in a Rollover IRA it is extremely important that you complete the process within 60 days. If you miss this deadline, you will be subject to huge taxes. There are two different kinds of rollovers with very different tax implications. There is the direct rollover IRA and the indirect rollover IRA.

A direct rollover is where your money is transferred directly from one retirement account to another. Here, no money is withheld for taxes. It transfers funds from your former company to a new trustee. It involves two things. First, it involves a non-IRA retirement plan, such as a qualified plan, 403(b) account or 457(b) account on the receiving or delivering end. Next, the distributed assets are payable to the receiving custodian/trustee or retirement plan, for the benefit of the participant. One thing here is that the funds are never paid to the individual, but rather to a company as a trustee.

An indirect rollover is simply the opposite. Here, the assets are distributed to the participant/employee, who has 60-days after the date of receipt to rollover the amount to an eligible retirement plan. That is, you cash out your old retirement plan and re-invest the funds in a new plan in 60 days or less. Funds are simply distributed to an individual who then must deposit those funds with a new trustee. By doing this, 10 to 20 percent of the money is withheld for taxes.

How a Rollover IRA works

Generally, you are eligible for a rollover when you leave your job, voluntarily or involuntarily. However, some plans also offer what is called an “In Service 401(k) Distribution”. This allows you to rollover your 401(k) fund even while you are still working with a specific employer. You can choose to follow any of the options stated above but opting for a Rollover IRA is usually the best option. You would be able to lower your investment expenses and gain access to a much wider variety of investment options. You can switch among the many different brokerage firms to take advantage of different investment options, tools, features, prices, fees, and many other benefits.

After you have decided to go for a Rollover IRA, here are the three steps you need to take:

  • Open an Individual Retirement Account (IRA) with any financial institution that offers an IRA
  • Inform your employer that you want to rollover to an IRA
  • Invest Your Money

Rollovers typically take 2 to 3 weeks to complete. Make sure you research the investment company well before you open an IRA with them, and do your due diligence when selecting your investments. Where you require the services of an expert, be sure to engage a good broker and you would be safe.

Advantages and Disadvantages of Rollover IRA

There are numerous advantages and disadvantages of performing a rollover IRA. Here is a rundown:

Advantages

  • You are open to numerous investing options
  • Simplification
  • The fees with an IRA can often be lower than what is charged by your plan administrator
  • No immediate action is required
  • Continued Tax Deferral
  • Your former employer may offer additional services, such as investing tools and guidance
  • Assets in a 401(k) are usually protected from claims by creditors.
  • Your former employer’s plan may have lower administrative and/or investment fees and expenses than a new 401(k) or an IRA
  • You still have the option of rolling over to an IRA or to a 401(k) offered by a new employer in the future, if the new employer’s plan accepts rollovers
  • You may be able to take a partial distribution or receive instalment payments from your former employer’s plan
  • If you leave your job between ages 55 and 59½, you may be able to take penalty-free withdrawals
  • Required minimum distributions (RMDs) may be delayed beyond age 70½ if you’re still working

Disadvantages

  • You are no longer allowed to contribute to a former employer’s 401(k)
  • Your range of investment choices may be limited
  • Savings left in multiple plans can be complicated to manage
  • The fees and expenses for your former employer’s 401(k) may be higher than those for a new employer’s 401(k) or an IRA
  • If you hold stock in your former employer in the plan, you may have special tax or financial planning needs you should consider before rolling over your assets to a new employer’s 401(k) or an IRA