IRA Rollover Rules

ira rollover rules

When the time comes for you to move on from your current employer either because it’s time to retire or because you wish to pursue your fortunes elsewhere, IRA rollover rules might be a concern. You’ll want to know how to get the money you saved in your employer-sponsored retirement plan, herein referred to as the 401k.

Well, all you need to do is a 401k rollover, meaning you move your retirement savings from your former employer’s retirement plan to another IRA of your choice.

Some rules guide IRA rollovers and any IRA rollover process performed contrary to stipulated guidelines attract penalties and taxes that are ideally avoidable.

When prompted to undertake an IRA rollover, these are some of the rules and considerations that you should observe.

Cash out. But please don’t. Cashing out your 401k plan is the same as making an early withdrawal, which is an unqualified distribution that attracts taxes and penalties. The taxes are triggered because 401ks are tax-deferred accounts; hence, all contributions are only taxed the moment they are withdrawn for expenditure.

Transfer to next employer’s 401k. You can rollover your 401k to your new employer’s 401k if your new employer’s plan has better benefits than your previous employer’s 401k. Observe that both accounts have the same taxation requirements i.e. both should be tax-deferred traditional 401ks or both should be Roth 401k’s. This way, you won’t trigger taxes and conversion penalties.

Direct rollover. Instruct your administrator to move your 401k to an IRA of your choice at a bank or brokerage. The direct rollover applies when moving a traditional 401k to a traditional IRA or when moving a Roth 401k to a Roth IRA. No taxes are triggered during this rollover for either the traditional or Roth rollover.

Moving money across different retirement accounts, e.g. from traditional 401k to a Roth IRA becomes a conversion that triggers other rules distinct from the IRA rollover rules.

Indirect rollover. When your employer gives you a check for a qualified distribution, you can convert this distribution into an IRA, and this becomes an indirect rollover. The taxes drawn from this distribution will be withheld and recuperated from another source if the full rollover is conducted within 60 days of the distribution. Indirect IRA rollovers can be a good way of loaning yourself some money from your retirement and pay it back before the taxation rules are flouted. Withholding tax for qualified retirement withdrawals is a mandatory 20% deduction of the total amount withdrawn.

Contribution limits. Yes, they still apply to IRA rollover. The annual contribution limit for the year 2016-2017 is $5,500, and $6,500 if the contributor is over 50 years of age. The rates apply to both traditional IRAs and Roth IRAs after rollover.

The most important rule for IRA rollovers remains to be “Do not cash out.” Cashing out is tantamount to robbing yourself after working hard, and stealing from your future with impunity. Unless there is an emergency that needs urgent money and you cannot fund this crisis from any other source, then stay away from cashing out your 401k. You will need this money more in the future.

To learn and understand more about IRA rollover rules, register for a free tax planning event near you.

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