AND LEARN HOW THEY CAN IMPACT YOU
If you have a retirement account set up and you're making regular contributions, that's great! There may come a time when you need to move these retirement savings from one account to another, and there are rules that come with this transaction.
A common reason that people initiate a rollover is because they are changing employers. Rather than keeping any money in a 401(k) under a former employer's retirement administrator, you can move your savings into a traditional or Roth IRA.
IRA Transfer Options
When you transfer your IRA funds from one financial institution to another, you have a few options.
There is a custodian/trustee to custodian/trustee transfer. This type of transaction leaves the transfer to the financial institutions and ensures that you, the account holder, don't come into contact with any funds. It's a straightforward method and avoids any penalties or tax scenarios.
IRA 60-Day Rollover Rule
You can also transfer funds using a rollover. In this case, as the account holder, you're more involved with the transfer. In fact, it becomes your responsibility.
Using an IRA rollover, the original custodian sends you a check for the total amount you're withdrawing from your IRA. You'll then send the check to the new custodian. You have 60 days from when you receive the funds from the previous financial institution to when the new financial institution receives the funds.
Should the new financial institution not receive the check within the 60-day window, you could incur income tax on your funds and have to pay penalties.
One key component of a rollover is that the check from your former IRA institution is made payable to you. If you're moving your money via transfer, the check is payable to the receiving institution for your benefit.
To qualify for the 60-day rule, the two accounts must be the same type of IRA – Roth or traditional IRA. The original custodian will send a tax form called a 1099-R, which you will file with your yearly income taxes. The custodian will also submit a Form 5498 to the IRS showing the contributed/transferred amount.
One Year Waiting Rule
You're allowed one rollover per year. Any additional rollovers will count as a distribution, and you will have to report those funds as income on your taxes. If you decide to have a custodian transfer the funds instead, there isn't a limit to how many transactions you can make.
If you plan to rollover or transfer your retirement funds, it's crucial you follow all the rules, as the IRS is strict about people following this process correctly. If you're thinking about moving your retirement funds, contact the office to find the simplest and most effective way to transfer your money.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of the FINRA website for additional information.