My IRA Rollover - Expert advice on IRA Rollovers - Learn how to roll over your IRA.

It is very easy to move assets from an IRA or retirement plan to an IRA rollover account. The receiving IRA custodian will help you by providing the forms and complete instructions. Once the assets have been placed in the new IRA rollover account, you have complete control over the way they are managed. Think of your IRA rollover account as your money. You can invest it any way you wish, subject only to the custodian's investment offerings and a very few prohibited transactions listed by the IRS. The only thing you can't do -- without paying applicable taxes and penalties -- is take the money out and spend it. But as long as you leave it in the account to grow, you can manage it any way you wish. The better you manage your IRA the larger your nest egg can become and the more income you may have during retirement.

Finding a custodian

Each IRA must be held by an authorized custodian. This is so the IRS can keep tabs on it and collect the necessary taxes and penalties when money is taken out of the account. The basic function of a custodian is to simply hold the assets and report any distributions to the IRS. However, the IRA business is pretty competitive, so most financial institutions offer products and services to entice you to bring your money to them. Your first step in any IRA rollover is to shop around and find the right custodian. The custodian will then help you complete the rollover so it complies with regulations for avoiding tax at the time of the rollover.

Here are some of the features you should look for in an IRA custodian.

Investment selection — The broader the selection of investment vehicles a custodian offers, the more flexibility you'll have in investing your IRA assets. Some IRA custodians offer little more than interest-bearing accounts, while others offer a full range of investment vehicles including thousands of mutual funds and access to stocks, bonds, exchange traded funds (ETFs), and more. Most mutual fund companies serve as IRA custodians, but their offerings are generally limited to their own funds. If you want the flexibility to choose a U.S. stock fund from Fund Family A and an international fund from Fund Family B, for example, you should select a custodian that offers a wide range of mutual funds. This allows you to choose best-of-breed funds without being limited to the offerings of one fund family.

Fees — IRA fees can add up over the years, so be sure to ask about fees when you are shopping for an IRA custodian. In addition to an annual custodial fee, there may be charges associated with the investments, such as sales loads and expense ratios on mutual funds and transaction fees on stocks, bonds, and funds. As with any comparison shopping, be sure to evaluate the fees in relation to what you are getting for your money.

Service — Some custodians are bare-bones providers, while others take the time to walk you through the process, helping you with investments, and assisting you with general financial planning issues. Your current focus may be on putting money into the account and watching it grow, but when the time comes to start withdrawing funds you'll need someone who knows the rules and can help you take distributions in a manner that will avoid unnecessary taxes and penalties. You may pay more for the hand-holding, but if it saves you money in the long run, the additional fees may be worth it.

Direct transfer vs. 60-day rollover

The term IRA rollover is often used to describe any situation where assets in a retirement plan or IRA are moved from one institution to another in a manner that avoids current taxes. But IRS regulations make a clear distinction between a direct trustee-to-trustee transfer and an IRA rollover.

Direct transfer — A direct trustee-to-trustee transfer takes place when assets are sent from one institution to another without the money ever coming into your possession. This is the safest form of "rollover" because you never touch the money, and no form is sent to the IRS telling them a distribution has been made. Also, if you inherit an IRA, a direct transfer is the only way you can move the account to a new custodian. However, there may be times when a direct transfer is not possible or desired. Some institutions may refuse to do them, or you may be worried about having control over your investments while the IRA is in transit. In this case you may want to consider a 60-day rollover.

60-day rollover — With a 60-day rollover you tell the current administrator or custodian that you want to take a distribution from the account. The check is payable to you personally, and you have 60 days to deposit the money into a new IRA to avoid taxes and possible penalties. The custodian will report this distribution to the IRS but the 1099 form gets offset to zero on your personal return, as long as the 60-day rule isn’t violated. The 60-day rollover is a little more dangerous than a direct transfer because the check could get lost in the mail, you could lose track of time, the dog could eat the check, and so on. But sometimes it's the most expedient way to move money from one bureaucratic institution to another, especially if you are actively monitoring the investments and do not want to go very long without having control over your assets. The funds may be used for any purpose during this 60-day period.

If you are moving assets from a retirement plan to an IRA using the 60-day rollover method, 20% will be withheld for taxes. You can reclaim these funds when you file your tax return, but only if you roll over the entire amount. For example, if you receive a pension distribution of $20,000, your net check would be $16,000 because taxes of $4,000 (20% of $20,000) would have been withheld. If you rolled over just the $16,000, you would owe taxes and possible penalties on the $4,000 not rolled over. To avoid this, you would have to dig up $4,000 from somewhere else and put it with the $16,000 to do a complete rollover of $20,000 -- and you must do this within 60 days of receiving the $16,000 check. You can avoid this hassle by telling your pension administrator to do a direct trustee-to-trustee transfer. In that case the full $20,000 would be sent to the new custodian.

By the way, the 60-day rollover of the same assets is available once every 12-month period. This is to prevent people from "borrowing" their IRA money over and over again for 60 days at a time. Note that the restriction applies to the same assets only. It is perfectly OK to roll over a pension distribution and an IRA within the same 12-month period as long as they involve different assets.

Naming beneficiaries

In some ways IRAs are wonderful estate planning tools because they allow assets to pass to beneficiaries outside of probate. This means no going to court and no probate fees (at least for the IRA; your other assets are another matter). Also, IRA beneficiary forms supercede a person's will. So if your outdated will says that all your worldly goods should go to your now ex-husband, but your freshly executed IRA beneficiary form names your two children, the kids will get the IRA if you die. Many IRA custodians require all IRA holders to update their beneficiary forms once a year.

There are some rather rigid rules that apply to inherited IRAs, especially when the beneficiary is someone other than a spouse. For example, if your kids inherit your IRA they can't just retitle the account in their own names as they may be able to do with the house and other assets you leave them. To do so would constitute an immediate taxable distribution and remove the assets from the tax-deferred umbrella. There are specific rules for the way inherited IRAs must be titled as well as rules for taking distributions. If beneficiaries fail to take the required amount, they may be subject to a 50% excise tax! When naming beneficiaries you'll want to consider the rules for beneficiaries (even though you won't be around to follow them) and perhaps provide a roadmap or the name of a knowledgeable advisor who will make sure they don't mess up.

When an IRA is relatively small, the estate-planning implications are somewhat minor. But when it gets into six or seven figures, you will need professional advice on how to complete your IRA beneficiary designations so they coordinate with the rest of your estate plan. Failure to do so may cost your heirs a bundle in unnecessary taxes. IRAs are wonderful tax-saving vehicles when you are in the accumulation phase, but once you're dead Uncle Sam wants his due. A good estate planning attorney will help you set up your IRA to minimize taxes to the extent possible.