Rollover

Rollovers A retirement plan rollover – moving your savings from an employer-sponsored retirement plan to another employer’s plan or individual retirement account such as an IRA – is something you are likely to encounter at least once in your lifetime.

Rollovers of funds from a former employer’s plan are commonly used when you join a new company and consolidate the old plan with the new one in order to take advantage of employer matched contributions. Some company-sponsored plans also allow for partial “in-service” rollovers that are usually limited to 50% of the amount of the fund not to exceed $50,000. Other times, individuals choose to rollover funds from an inactive plan to an individual retirement account that can hold a wider variety of investment options (sometimes referred to as a self-directed IRA).

Handled properly, rollovers should not create unnecessary fees, taxes or penalties. Here are a few considerations when deciding to rollover an inactive retirement plan.

1. Missing the 60-day window to deposit a rollover check

There are two ways to rollover your savings when you change employers. One option is to have your plan administrator transfer the money directly into the new company-sponsored retirement plan (making the check payable to the new plan administrator or account custodian). The second option is to collect a check from your previous investment manager, and then deposit it into the new account.

If you opt for the second option, you must deposit the check into another retirement plan within sixty (60) days. If you don’t, the IRS will consider the check amount as a distribution, not a rollover, and you will owe taxes on the full amount withdrawn. And if you are younger than 59 ½ (the age at which distributions are allowed), you will also be charged an additional 10% early withdrawal penalty.

A direct transfer arranged through your plan administrator is usually the safest route, but if you do go for a rollover check, remember to move quickly to avoid unnecessary taxes and penalties.

2. Tax considerations of Roth conversions

You can rollover your old 401(k) or other retirement plan to one of two types of accounts – a Traditional IRA or a Roth IRA – both of which have benefits and tradeoffs. A Roth IRA allows your savings to grow tax-free, so that you do not owe any income taxes once you start withdrawing money in retirement. The tradeoff is that you have to fund the Roth IRA with after-tax money.

Additionally, if you rollover an old 401(k) or convert a Traditional IRA into a Roth IRA, you will be transferring pre-tax money. As a result, the funds being converted will be treated as income, claimed on that year’s income tax return and taxed at your current income tax rate. With a Roth IRA you pay taxes now which means your future distributions are tax free.

3. Multiple Traditional IRA rollovers per year

Under IRS rules you are allowed to roll over one distribution for each IRA owned per year. This rule is in place to prevent people from making multiple rollovers per year and effectively using their IRA funds as a short-term loan. Making more than one rollover in one calendar year will count as a withdrawal, triggering taxes and an early withdrawal penalty.

It’s important to note that this rule does not affect an IRA owner’s option to transfer assets from one IRA directly to another IRA of the same type.

4. Not making a rollover

Retirement is probably not something you think about every day, and it is easy to get complacent about planning for the future. But if you just leave your money in an inactive retirement plan sponsored by a previous employer, there is a good chance that higher fees, no matching contributions and limited investment choices will slow down the growth in that account.

5. Not considering a self-directed IRA

So, you’ve decided that you need to do a rollover. Now, it’s important to consider all your available investment options. One of the most tax-efficient accounts that many investors overlook is the self-directed IRA. This type of account lets you invest in a much wider range of assets such as real estate, trust deeds and promissory notes, precious metals, private funds, private equity and crowdfunded offerings. This makes it a great investment vehicle for those looking to further diversify their retirement savings portfolios to grow retirement wealth or turn wealth into income.

IRA-Myths IRA accounts are one of the most popular ways for Americans to save for retirement. These accounts are synonymous with security and reliability and are used by millions. However, despite their popularity, IRAs are still poorly understood by many and there continues to be some popular misconceptions about these investment vehicles.

Is your retirement strategy falling victim to any of these IRA myths?

1. “I earn too much to use an IRA”

It’s true that the Roth IRA eligibility rules are pretty much set in stone. If you are single and earn more than $132,000 or are married and earn more than $194,000 combined you cannot use a Roth IRA.

However, Traditional IRA accounts are only subject to income limits ($71,000 if you are single and $118,000 if you are married) only if you have a retirement plan through your employer. If you do not have a work retirement plan, you can use the Traditional IRA and receive the tax deduction for your contributions, no matter how much you make.

Even if you do have a retirement plan through your job and earn more than the Traditional IRA income limits, you can still contribute to a Traditional IRA, however, you won’t receive a tax deduction. Some people in this situation may find it still makes sense to use the Traditional IRA, even without the tax deduction, because investments in the account would grow tax-deferred.

2. “I can’t use an IRA because I already have a 401k”

You are still eligible for a self-directed IRA, even if your employer provides a 401k or some other retirement plan, but the income restrictions still apply. Depending on how much you earn, your work plan may prevent you from receiving a tax deduction for a Traditional IRA (see above for income limits).

3. “I don’t need an IRA because I already have a 401k”

Even if you have a 401k, an IRA could still play a valuable role in your retirement plan. IRAs offer a wider range of investment options and the fees on an IRA could be lower than those on a 401k. Also, with a Roth IRA, you can earn tax-free income in retirement. While some companies offer a Roth 401k, many do not which means you’d owe taxes on your 401k withdrawals during retirement. This isn’t to say you shouldn’t use your 401k, just remember that a good retirement plan takes advantage of multiple investment types.

4. “I can only invest my IRA in stocks and bonds”

Not true. While most brokerage firms limit client investments to traditional assets like stocks, bonds, and mutual funds, the IRS actually allows a much wider array of investments through IRAs. Alternative assets for IRAs include real estate, precious metals, and business partnerships, but you need to find a broker that accepts these investments through an account called a self-directed IRA. These accounts work nearly exactly the same as a regular IRA except they allow a wider range of investments. That said, make sure you are working with someone that understands the rules of self-directed IRAs to avoid any IRS penalties.

5. “My money will be locked up in an IRA until I retire”

It’s true that IRAs are designed to de-incentivize account withdrawals until you are at least 59 ½ years, and early withdrawals do incur a 10% tax penalty. However, there are a number of loopholes to this rule. Penalty-free early withdrawals are allowed if you become disabled, if you need to pay higher education expenses for yourself or a family member, or if you have medical bills that exceed 10% of your income. Other scenarios where early withdrawals are accepted include if you are unemployed and need to buy health insurance, if you are buying your first home, and if you need the money to pay back taxes.

In addition, Roth IRAs allow you to take out some or all of your contributions for any reason without a penalty. The penalty only applies when you withdraw investment gains from the Roth IRA.

6. “I can’t move my IRA to a different broker”

If you find yourself unhappy with your investment options or simply find a better option, you are by no means locked in with broker that set up your IRA. At any point, you can transfer your savings to another company and broker through what’s called a “rollover.” You do not have to pay taxes on a rollover because it is not a withdrawal, but simply a transfer between accounts.

Your retirement plan is too important to base on myths. For more information on IRAs, you may also like to know about these 6 investments that are not allowed in a self-directed IRA.

5 Mistakes That Can Derail Your Retirement Plan Rollover