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Rolling Over Your retirement account to an IRA

Before I begin here are some Traditional IRA Facts as of 2009/2010:

– Tax deductible contributions of $5,000 ($6,000 age 50 and above)
– AGI (Annual Gross Income) for deduction is: Single= Head of household is more than 55,000 but less than 66,000 and Married= 89,000 but less than 109,000 if filing joint
– Withdraws begin at age 59 1/2 and are MANDATORY by 70 1/2
– Taxes are pain on earnings when withdrawn from IRA
– Can purchase investments such as Stocks, Bonds, Mutual Funds, ETFs, CDs, Treasuries, etc.
– Funds withdrawn prior to 59 1/2 are subject to a 10% penalty
– With some exceptions such as purchasing a 1st home, educational expenses, and certain medical/disability expenses. Highly recommend AGAINST this unless it is VITAL. Sometimes the IRS will see this and may surprise you.

Rolling over your retirement plan from a previous employer to a Traditional IRA (in case you are wondering, IRA stands for Individual retirement account) is very simple but if you don’t do it correctly it will cost you! First the benefits on WHY you should roll the account over:

1) You can roll over your retirement plan to a traditional IRA REGARDLESS OF INCOME LIMITS!

1a. This is because the funds already in your account are “qualified”.

2) You have MORE investment options: This is a big one! Traditionally you are only allowed to invest in mutual funds (as of writing this article, but there has been talks of adding ETF’s which would be fantastic!). These mutual funds are chosen by the employer and the adviser/consultant who manages these assets. In a IRA you can choose between almost anything that you can traditionally invest in such as Stocks, Bonds, Mutual Funds, ETFs, CDs, Treasuries, etc. Think of an IRA as a regular brokerage account EXCEPT it has MAJOR tax benefits.

3) NO TAX EVENT will occur when you do this correctly!

3a. Will explain HOW to do this later in the article

4) You will have more control over your assets knowing it is secured in a place that you have access to instead of having the assets with the previous employer.

5) IRA’s can be very easily put into an estate plan

6) You can continue contributing to your retirement account (as of the writing of this article: $5,000 max!).

7) If you already have an Rollover IRA, you can simply deposit it over to your current rollover IRA or open a new IRA and still contribute both IRAs (Again, max COMBINED is $5,000)

7a. Ex: Contribute IRA 1 with $2,000 and IRA 2 with $3,000 = $5,000 per year

Now these benefits are great and just having more investable options is fantastic! Now there can be slight problems if you don’t do this correctly so I have put in Scenarios with Solutions on HOW to rollover your previous employers retirement account to a Traditional IRA:

Scenario 1= Avoiding 20% withholding:

You leave (or were let go from) a previous employer and you have been smart enough to invest in your retirement plan. Now you have X amount of funds in your retirement plan. You request to withdrawal the account and figure out what you will do with the funds later. Because you did this YOU WILL HAVE TO PAY 20% TO THE IRS!

Solution 1= “Direct” Rollover (also known as Trustee to Trustee rollover or transfer)

The previous employer will have you fill out some paperwork (usually 1-2 pages with signatures, initials, and check boxes) to make sure it is a “Direct” rollover. They will then send you a check. The check will look more or less like “(Name of Financial Institution), for the benefit of (your full name)”. This will show the IRS that you have no intentions of using the money and it will be deposited to a qualified retirement account. This will avoid a 20% withholding. HOWEVER, you will have 60 days to deposit the check (I highly recommend just having the check sent directly to the financial institution. This will avoid any complications that may occur). There are no “extensions” or holidays taken within those 60 days. If you fail to make that deposit, you will be paying federal taxes!
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