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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 to 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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How to Avoid an IRA Rollover Mistake

When it comes to managing your retirement savings, an Individual retirement account (IRA) can be a smart choice. IRAs offer tax advantages and the flexibility to choose your investments. However, if you’re considering an IRA rollover, it’s essential to avoid common mistakes that can have significant financial consequences. In this article, we will explore some tips to help you navigate the process smoothly.

What is an IRA rollover?

An IRA rollover refers to transferring funds from one retirement account to another. This can be from an employer-sponsored retirement plan like a 401(k) or a traditional IRA into a different IRA. Rollovers offer several benefits, such as consolidating your retirement savings, accessing a more diverse range of investment options, or converting to a Roth IRA for potential tax advantages.

However, if not executed properly, an IRA rollover can trigger taxes, penalties, or even loss of funds. To avoid these potential pitfalls, consider the following guidelines:

1. Know the rules and deadlines: Familiarize yourself with the IRS rules surrounding IRA rollovers. Generally, you have 60 days to complete a rollover without incurring any penalties or tax obligations. Missing the deadline could result in unintended tax consequences.

2. Consider direct rollovers: The safest way to transfer funds without tax implications is to opt for a direct rollover or trustee-to-trustee transfer. With these methods, the funds are directly moved from one institution to another, minimizing the risk of mishandling or triggering taxable events.

3. Beware of indirect rollovers: If you decide to receive the funds directly and then move them into a new account, remember the 60-day deadline. If you fail to meet this timeframe, the withdrawal will be treated as a taxable distribution, meaning you’ll owe taxes and potentially face early withdrawal penalties, if applicable.

4. Watch out for withholding taxes: If you receive a check for a rollover, the financial institution may withhold a portion for taxes. To avoid this, explicitly instruct the old account provider to perform a direct transfer. That way, the funds go directly to the new account without any tax withholding.

5. Be cautious with combining pre-tax and after-tax funds: If you have a mix of pre-tax and after-tax funds in your old account, such as contributions to a traditional deductible IRA and a non-deductible IRA, be careful not to commingle them during the rollover process. Mishandling can result in additional taxes and complications later on.

6. Seek professional guidance: If you’re uncertain about the rollover process, consider consulting a financial advisor or tax professional. They can guide you through the complexities and help you make informed decisions that align with your financial goals.

Lastly, remember that the IRS allows only one indirect rollover per 12-month period. Violating this rule can trigger additional taxes and penalties. Therefore, if you need to transfer funds multiple times within a year, it’s best to opt for direct rollovers.

In conclusion, an IRA rollover can be a valuable tool to optimize your retirement savings. However, it’s essential to proceed with caution to avoid any mistakes that could have adverse financial consequences. By familiarizing yourself with the rules, opting for direct rollovers, and seeking professional advice when needed, you can navigate the process successfully and safeguard your hard-earned retirement funds.