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IRA Rollovers

Do you have retirement accounts at previous employers and don't know what to do with them? There are many options and decisions to be made with regard to retirement funds at previous employers and you should know what your options are before you make any decisions. Click here to download a whitepaper about your Rollover options

Generally there are 4 main options:

  • Rollover to an IRA (Individual Retirement Account)
  • Take a lump-sum distribution
  • Move it to your new employer's plan (if allowed)
  • Leave it in the current plan

Your individual circumstances will determine the best option for you. For example, you might need some of the funds, you like the investment options in the employer plan, federal creditor protection, you qualify for special tax breaks on lump sum distributions such as 10 year averaging, Net Unrealized Appreciation (NUA) on employer stock held in the plan, etc.

The IRA Rollover is often the primary choice for several important reasons:

If you choose an IRA Rollover, be aware of the procedures. For instance, if you take a distribution from an employer plan, you will have 60 days to rollover to an IRA, however when this path is chosen, employer plans must withhold 20% to the IRS and in order to complete the rollover you must come up with the withheld funds out of your own pocket otherwise you will have a taxable distribution of the withheld amount.

For example, suppose you have a balance of $300,000 that you wish to rollover but take the distribution directly. The plan will withhold 20% or $60,000 leaving you with $240,000. In order to complete the rollover you will need to come up with the $60,000 from your pocket and deposit the full $300,000 to the IRA within 60 days. Suppose you don't have the $60,000, then the result is a taxable distribution of $60,000.

The way to avoid this is to do a "trustee to trustee” or direct transfer from the employer plan to the IRA. This is done by having the plan send the funds directly to the new IRA custodian, or sending a check to you as long as it is made payable to your IRA (not payable to you) which avoids the 20% withholding requirement. An IRA owner is allowed only one 60 day rollover per 365 days (not per year) per IRA and violating the 60 day rollover rules can have disastrous consequences such as unnecessary taxation and loss of your IRA. An IRA owner is allowed an unlimited number of trustee to trustee transfers per year making it the preferred choice.

Don't rollover too quick or chose an IRA rollover without considering all factors. For example, if you qualify for the special tax break, Net Unrealized Appreciation on employer stock held in the plan, you must follow specific procedures to take advantage of this break. If you rollover and do not take proper steps, this tax break is irrevocably lost, so if your advisor asks you to rollover your IRA without asking if you have employer stock in your 401k, pick another advisor.

Before making the decision, be sure you are working with a qualified advisor familiar with IRA rules. Don't assume your advisor knows these rules just because they work for a well known brokerage house or Wall Street firm. Chose to work with an Ed Slott Master Elite IRA Advisor and be confident that your life savings are in knowledgeable hands.
If you think an IRA Rollover is right for you, schedule a complimentary Discovery Consultation to learn more.