Rollover IRA

Changing jobs happens to most people several times in a lifetime. If you have a retirement plan at your workplace and then change jobs, you have several options concerning your retirement account.

The simplest and most flexible option may be to roll the distribution directly into an IRA. This is a direct distribution and may be the best way to handle the rollover.

In an indirect rollover, your old employer sends a check to you but is legally required to withhold 20 percent for income tax purposes. To avoid penalties for taking a non-qualified distribution, you have 60 days to place the funds in another qualified retirement account. But here's the catch: You must contribute the entire amount of your previous account, making up the 20 percent difference from your own pocket. You can recover the money later, when you file your income taxes.

Handling the rollover this way can be a headache, particularly if you have trouble replacing the 20 percent withholding. If you have the employer transfer the funds into the IRA directly, or send you a check payable to the financial institution housing your IRA, there is no required withholding.

If you fail to reinvest the distribution before the 60-day deadline, you must pay a penalty plus ordinary income tax on the distribution.

Rolling over assets to an IRA is just one of several choices investors have in determining what to do with their old retirement plans. Other options are as follows, and each may have distinct advantages and disadvantages:

  1. Roll over assets to an IRA
  2. Leave assets in a former employer’s plan, if the plan allows
  3. Move assets to a new or existing employer’s plan, if the plan allows
  4. Cash out/take a lump sum distribution

When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty-free withdrawals are available, treatment of employer stock, when required minimum distributions begin, and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA may involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.

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