If you’re changing jobs or retiring, it’s important to know the rules regarding moving funds from your employer sponsored retirement plan.
The wrong move could cost you in income taxes and early withdrawal penalties.
There are two basic ways to move retirement plan assets from one retirement plan into another with no tax consequence.
With a direct rollover your financial institution or plan directly transfers the payment to another plan or IRA; no taxes are withheld and your account continues to grow tax-deferred.
With an indirect rollover, a check is made payable to you. You have 60 days to deposit it into a Rollover IRA – but indirect rollovers are subject to 20% withholding.
For example, if you had $10,000 eligible to rollover, your employer would withhold $2000 and you’d get a check for $8,000. You’ll get the $2000 that was withheld back when you file a tax return, either as a refund or a credit toward any tax owed.
However, in 60 days you still have to deposit the entire $10,000 in a rollover account – the $8,000 from your employer plus $2000 from your own resources. Any amount you don’t rollover is considered income, and subject to taxes when you file your return. You could also face a 10% early withdrawal penalty, depending on your age.
To learn more about how to avoid complications with a retirement plan rollover, give us a call today.
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An Individual retirement account (IRA) is a powerful tool for saving for retirement. IRAs offer tax advantages, flexible investment options, and the ability to choose when and how to withdraw funds. However, if you’re not careful, you could unknowingly make an IRA rollover mistake, which could result in taxes and penalties. Here are some tips to help you avoid making an IRA rollover mistake.
Know the difference between a direct rollover and an indirect rollover
When you’re transferring funds from one IRA to another, you can choose to do a direct rollover or an indirect rollover. With a direct rollover, the funds are transferred directly from one IRA custodian to another. With an indirect rollover, you receive a check made payable to you, then have 60 days to deposit the funds into another IRA.
The problem with an indirect rollover is that the custodian must withhold 20% of the funds for taxes. You then have to come up with that 20% out of pocket to complete the rollover and avoid taxes and penalties.
So, if you want to avoid an IRA rollover mistake, always choose a direct rollover. This way, you avoid the risk of withholding and have a seamless transfer of funds between IRAs.
Understand the 60-day rule
If you do choose to do an indirect rollover, make sure you understand the 60-day rule. You have 60 days to deposit the funds into the new IRA. If you fail to do so, the funds will be considered a withdrawal, and you’ll be subject to taxes and penalties.
To avoid this mistake, make sure you’re aware of the 60-day rule and have a plan in place to make the deposit promptly.
Don’t mix pre-tax and after-tax funds
If you have after-tax funds in your IRA, you may be tempted to roll them over into a Roth IRA to avoid taxes in the future. However, if you mix pre-tax and after-tax funds during a rollover, you could inadvertently trigger taxes and penalties.
To avoid this mistake, make sure you keep pre-tax and after-tax funds separate during a rollover. This way, you’ll be able to take advantage of the tax benefits of a Roth IRA without triggering unnecessary taxes and penalties.
Choose your IRA custodian carefully
Finally, make sure you choose your IRA custodian carefully. Look for a custodian that offers competitive fees, a broad range of investment options, and excellent customer service. A reputable custodian can help you avoid mistakes and make the most of your IRA.
In conclusion, an IRA is a powerful tool for saving for retirement, but it’s essential to avoid rollover mistakes. By understanding the difference between direct and indirect rollovers, following the 60-day rule, not mixing pre-tax and after-tax funds, and choosing your IRA custodian wisely, you can make the most of your IRA and avoid unnecessary taxes and penalties.
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