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If you are looking for information on IRA rollovers you've come to the right place. This site is dedicated to helping people preserve the tax advantages of qualified retirement plans and IRAs by understanding the rules associated with them. The rules are not complicated, but there are lots of them. Some deal with how to do the rollover itself, some pertain to the investments within the IRA, and some very important ones relate to how and when you can and must take distributions from your IRA. We cover many of them here. If you've landed on this site, you probably have some idea of what an IRA rollover is — a tax-free transfer of assets from a tax-deferred retirement program (such as a 401(k) or pension or another IRA) into your personal Individual Retirement Account. There are several reasons why you might want to utilize an IRA rollover. The main one is to avoid tax liability at the time you are eligible to receive benefits from a qualified plan. Rather than take direct receipt of the money, you arrange to have it placed into an IRA rollover account. This saves you from having to report a taxable distribution and paying income taxes at that time. Another key reason for utilizing an IRA rollover is to keep the assets growing without current taxability. Each year's investment income and capital gains do not have to be reported as long as they remain inside the IRA. The whole idea behind qualified retirement plans and IRAs is to give people incentive to save for retirement. Tax deferral is a powerful benefit because it allows you to invest money that would otherwise have to be paid out in taxes each year, thus enabling you to build your retirement fund that much faster. A third key reason for implementing an IRA rollover is to have more control over the assets. By transferring them from an employer-sponsored plan to your own self-directed IRA, you gain more investment options and the ability to control the timing and amount of distributions. While loans from IRAs are not allowed, you can often arrange to take early distributions for major expenses such as buying a home or paying college expenses. During retirement, your IRA will provide cash flow while you continue to manage the investments according to your risk tolerance and time horizon. Also, at some point you may consider converting your traditional IRA to a Roth IRA in order to receive income that is tax-free, rather than just tax-deferred. Uncle Sam wants you to save for retirement. The incentives are available. All you have to do is take advantage of them. Starting and maintaining your own IRA rollover account is one of the most important steps you can take toward economic independence. Triggering Events The following triggering events provide an opportunity to do an IRA rollover. Which of the following applies to you?
Congratulations on your impending retirement! How thrilled you must be to finally reap the rewards of many years of work. But before you ride off into the sunset, there's a bit more work to do: deciding what to do with the assets in your retirement plan. A fairly common strategy for many retirees is take a lump sum distribution and move it to an IRA rollover account. Whether you choose to take income right away or let the account grow undisturbed while you receive cash flow from other sources, your IRA rollover will be one of your most important assets during retirement. By investing carefully and managing withdrawals, you can make your nest egg last a long, long time IRA rollovers are pretty straightforward, but there are some technicalities that may require professional tax advice. For example, special consideration is warranted when you hold company stock in the retirement plan. You can learn more about the general rules on this site, but the best thing to do is to make an appointment with your tax advisor and obtain specific guidance on how to manage your retirement distribution at this important turning point in your life.
Changing jobs? You're not alone. According to the Department of Labor, the average worker will change jobs seven times during the course of a lifetime. The median tenure on a job is just four years -- less for younger workers. Whether you're switching to a better-paying job or seeking more-fulfilling work -- even if you're just taking a break from the workforce until you find something better -- you will need to make a decision about what to do with your retirement plan. Try to resist the temptation to cash out your retirement plan and spend it. Removing money from the tax-deferred umbrella is like squeezing toothpaste out of the tube: once it is out, it can never go back in. Even small amounts can make a difference. If you keep just $2,000 growing tax deferred at 8%, in 30 years it will be worth over $20,000, even if you never add another penny to it. But if you take it out and spend it -- or what's left of it after paying taxes and penalties -- the beginnings of your little nest egg will be gone. That's like destroying the seed that could one day become a mighty oak. All job changers should get into the IRA rollover habit. Each time you leave a job, transfer whatever amount you have in your retirement plan to your personal IRA. Do this several times over your career and watch the funds grow into a significant pot of money that's all yours. IRA rollovers provide pension portability for today's mobile workforce: your nest egg is not associated with any one employer but stays within your control. You can manage the funds any way you want (subject to IRS rules, but not employer rules) and even take early distributions if necessary. After your first IRA rollover the rest will be easy. You'll be amazed at what an important source of income this will be to you at retirement.
As you may have discovered already, not all IRAs are alike. If your IRA is at an institution offering limited investment options or poor service, you certainly have the right to move it to a different custodian, one that will provide better information and let you invest the way you want. Compare an IRA earning a low, bank rate of interest with one invested in a diversified portfolio of stocks. Let's say the bank IRA earns 5% per year and the stock IRA earns 8%. If you start with a $4,000 rollover and contribute another $4,000 each year for the next 20 years, the bank IRA would be worth around $143,000 while the stock IRA would have grown to nearly $202,000 Over 30 years the difference is even more dramatic: $283,000 versus $493,000. Moving an IRA from one institution to another is very easy, but does need to be done correctly or you could owe taxes and possible penalties. Even worse, the assets could end up outside the tax-deferred umbrella, never to go back in. Once you've chosen a new institution for your IRA -- hopefully one that provides good service and many investment choices -- the people there will tell you what is required to safely move the assets and help you effect the transfer.
If you are getting a divorce, your property settlement may call for splitting up IRAs and retirement plans. Special rules relate to transferring IRA or retirement plan assets between spouses but, when properly executed, no taxes are due at the time of transfer and the assets in the new IRA may keep growing tax deferred. The receiving spouse has full ownership of the IRA and may name a new beneficiary and maintain complete control over the account, including deciding how to invest the funds and manage withdrawals. The rules are different for moving IRAs versus retirement plans. In the case of an IRA, the transfer must be done as part of a court-approved divorce decree or legal separation agreement. In the case of qualified plan assets, the transfer is generally done under a qualified domestic relations order, or QDRO. This court-approved document gives the plan administrator permission to pay assets to the receiving spouse as alternate payee, who can then direct the plan administrator to forward the assets to his or her IRA. This all sounds complicated, but your divorce attorney should be able to guide you through the process.
Please accept our condolences on the loss of your spouse. You probably have a lot on your mind right now, and you may have been advised not to make any major financial decisions until your grief has subsided and your mind has cleared. However, certain decisions must be made in a timely manner or else you could lose valuable tax benefits. When a spouse dies, you have several options with regard to your spouse's IRA and/or plan assets. Rolling the assets into your own IRA rollover account is just one option. Before deciding what to do you should obtain qualified advice that takes into account your need for current income and your overall financial situation.
If you have been named the beneficiary of an IRA or retirement plan owned by someone other than a spouse, you must follow special rules for taking distributions from the account. The first thing you should know is that if you cash out the IRA, you will owe taxes (but not penalties) on the distribution. Also, you will lose the advantage of the tax deferral on investment earnings going forward. From a tax and wealth-building standpoint, it is wise to keep inherited IRA assets in the account as long as possible, taking distributions only when required based on the rules. Fortunately, the IRS allows you to stretch out distributions over your life expectancy so that taxes apply on a smaller amount of income each year. However, in order to take advantage of this tax-saving strategy, the first required minimum distribution must be taken by end of the first year after the IRA owner died. If you have been named the beneficiary of an employer-sponsored retirement plan owned by someone other than your spouse, you can roll it to your own IRA. This is new with the Pension Protection Act of 2006. Again, special rules must be followed. Inherited IRAs and retirement plans can be minefields for people who acquire them after a loved one's death. If you do not follow the rules you may pay more taxes than necessary, and may even be subject to penalties. Be sure to get qualified advice. |
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IRA Rollovers - Introduction
You are retiring
You are leaving your present job but plan to continue working
You have an IRA that you want to move to a different institution
You are getting a divorce
Your spouse has died
You have inherited an IRA or retirement plan from someone other than your spouse