Financial Education Institute

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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 $2,000 and you’d get a check for $8,000. The $2,000 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 $2,000 from your own resources. To learn more about your retirement plan options, give us a call today.

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When it comes to managing your retirement savings, it’s important to be aware of the potential pitfalls that could derail your financial plans. One common mistake that many individuals make is mishandling an IRA rollover. An IRA rollover is the process of transferring funds from one retirement account to another, and if not done correctly, it could result in hefty taxes and penalties. To help you avoid making an IRA rollover mistake, the Financial Education Institute has put together some important tips to keep in mind.

First and foremost, it’s crucial to understand the rules and regulations surrounding IRA rollovers. The IRS allows individuals to perform a tax-free rollover of their retirement funds as long as the transfer is completed within 60 days. However, it’s important to note that if you fail to complete the rollover within the 60-day window, the funds will be treated as a distribution and will be subject to income taxes and early withdrawal penalties if you are under 59 1/2.

To avoid this mistake, consider utilizing a direct rollover, also known as a trustee-to-trustee transfer. With a direct rollover, the funds are transferred directly from one financial institution to another, eliminating the risk of triggering a taxable event. This can provide a safer and more convenient way to move your retirement savings without the risk of missing the 60-day deadline.

It’s also important to be mindful of the potential tax consequences of an IRA rollover. If you receive a check for the funds and then deposit it into another IRA account, the financial institution will withhold 20% of the distribution for taxes. To avoid this tax withholding, opt for a direct rollover and instruct the financial institution to transfer the funds directly to the new IRA account.

Furthermore, be cautious of the “one rollover per year” rule. According to IRS regulations, individuals are only allowed to perform one rollover from an IRA account to another within a 12-month period. If you attempt to do more than one rollover in a year, the funds will be considered a taxable distribution. Always keep track of your rollover activities to ensure compliance with this rule.

Lastly, it’s advisable to seek professional advice from a financial advisor or tax expert when considering an IRA rollover. An experienced professional can provide guidance on the best approach for transferring your retirement funds, including any tax implications and potential pitfalls to avoid.

In conclusion, an IRA rollover can be a valuable tool for consolidating and managing your retirement savings, but it’s essential to be aware of the potential pitfalls to avoid costly mistakes. By understanding the rules and regulations, utilizing a direct rollover, and seeking professional guidance, you can ensure a smooth and successful transfer of your IRA funds. With careful planning and attention to detail, you can effectively manage your retirement savings and avoid the potential pitfalls of an IRA rollover.