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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. You typically have four options, and you may engage in a combination of these options. You can leave the money in your former employer’s plan, if permitted. You can also cash out the account value, but you should research the tax implications first. 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 – after that the entire amount is considered income, and subject to taxes. You could also face a 10% early withdrawal penalty, depending on your age. And, 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. The $2000 withheld counts as income taxes paid, but 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. To learn more about your retirement plan options, give us a call today.
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An IRA rollover is a process where you can transfer money from a retirement account, such as a 401(k), into an individual retirement account (IRA). This is a common strategy used by individuals to consolidate their retirement accounts and gain more control over their investments. However, there are a few common mistakes to avoid when doing an IRA rollover. Here are some tips from Apriem Advisors to help you avoid these mistakes.
1. Know the Rules Before You Roll Over
Before starting an IRA rollover, it is important to learn about the IRS rules on transfers. You can withdraw your funds from your 401(k) and roll them over into an IRA within 60 days without paying any taxes or penalties. If you fail to do it within 60 days, the money withdrawn may be taxed as ordinary income and may be subject to an additional tax penalty if you are younger than 59½. You can avoid this by using a transfer or a direct rollover, where the company holding your 401(k) account sends the funds directly to your IRA account.
2. Don’t Make the Check Out to Yourself
If you opt for a check for your IRA rollover, make sure the check is made out to the IRA custodian, not to you. Otherwise, the IRS may consider it a withdrawal and levy taxes and penalties on the entire balance.
3. Beware of Rollovers Between Different IRA Types
Many people assume that they can transfer their traditional IRA savings to a Roth IRA through a rollover. However, you cannot do so without incurring a tax liability. You can only convert the traditional IRA funds to Roth IRA by paying taxes on the amount converted at your current marginal tax rate.
4. Avoid Excessive Trading
Constantly buying and selling securities in your IRA can lead to tax penalties. As a rule, excessive trading is defined as more than six transactions in a year.
5. Seek Help from a Professional Advisor
If you’re feeling overwhelmed or confused by the rollover process, it is wise to seek guidance from a professional advisor. At Apriem Advisors, we have experienced financial advisors on hand to help you navigate the process and ensure that you make wise decisions.
At Apriem Advisors, we can help you avoid IRA rollover mistakes. For more information, contact our IRA rollover experts today.
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