IRA Rollover Rules

An IRA rollover occurs when you changes jobs or retire and as a result you are entitled to distribute or “rollover” your previous employer's retirement plan (such as a 401k, 403b, 457 plan etc) to an IRA.  It is critical to avoid negative tax implications when performing an IRA rollover so it is important to know the IRA rollover rules.

Below are the options that are available to you.

• Take a Cash Distribution
  If you elect to receive a cash distribution then the check is made payable to you.  Distributions made payable to you are subject to federal and state income taxes.  Your employer is required to withhold 20% from your distribution check as a prepayment of estimated taxes. Depending on your tax bracket you may owe more or less than 20% when you complete your tax return. In addition, your distribution is likely to be subject to a 10% pre-mature withdrawal penalty if you are under age 59 ½.
   
• Indirect Rollover
  You can elect to take a cash distribution and then deposit the money into your IRA or a 401k, 403b or 457 plan within 60 days.  Your employer is still required to withhold 20% for prepayment of federal income taxes. To avoid taxes and penalties, the entire distribution including the 20% withheld for income taxes must be deposited into your IRA or employer’s retirement plan. If any amount , including the 20% withholding, is not rolled over within 60 days then that amount will be subject to taxes and possible IRS penalties.
   
• Direct Rollover
  With a direct rollover, you authorize your employer to make your check payable directly to the new custodian for the benefit of your IRA or 401k, 403b or 457 plan.  This is sometimes referred to as a trustee-to-trustee transfer and there is no tax withholding, no taxes, and no penalties with this option. Your retirement savings will continue to grow tax-deferred. In most situations, a direct rollover makes the most sense since it avoids potential tax liabilities and penalties.

IRA Rollover Advantages

There are a number of advantages of rolling over an ex-employers retirement plan into an IRA. Learn more about the advantages of an
IRA Rollover.

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Disclosures:

*  The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.