Mistakes To Avoid When Rolling Over Your IRA
Congratulations! You've landed a new job and can't wait to begin. After the farewells have been said, it will be time to roll over the retirement funds from your old job to your new one. The IRS tells us that you have 60 days from when you receive your individual retirement account to roll it over into another IRA. If you transfer your funds within this period, there should not be a tax implication for you.
There are several ways you can handle this rollover:
Direct rollover — If you are receiving funds from a company-sponsored retirement plan, you can have the administrator of the plan make the payment directly into another plan or into an IRA. No taxes will be owed on the amount transferred.
Trustee-to-trustee transfer — Ask the financial institution managing the funds to electronically send them to another IRA. Make sure to give the current institution the details on where to send the funds. Once the funds have been transferred, confirm with the new plan manager that the funds have been received and are available to you if the need should arise. The funds remain tax deferred.
60-day rollover — If the retirement funds are paid directly to you, you have 60 days to move all or part of that into an IRA or other retirement plan. You will be responsible for paying taxes on the portion you do not roll over. Additionally, if you do not roll over the funds within the 60-day window, you will be subject to a 10% early withdrawal penalty if you are under age 58 1/2.
Mandatory distributions
Keep in mind that once you reach the age of 73, you will need to take required minimum distributions. These withdrawals will become part of your gross income and are considered taxable income. The amount of the distributions is based on a calculation that includes the previous year's Dec. 31 account balance and your life expectancy. April 1 of the year following the calendar year in which you reach age 73 is the beginning date for taking the distributions. If you should forget to take the distributions, you may have to pay a hefty 25% excise tax as a penalty. You need to be mindful of the once-per-year rule, which applies only to indirect IRA to IRA rollovers.
Cashing out an IRA is another option exercised by 42% of employees who switch to another job. Unless you have an immediate, urgent need for the money, you will face a substantial tax bill and a loss of potential growth income. If you do take the distribution in the form of a check sent directly to you, the IRS requires your plan administrator to retain 20% of federal taxes, just in case you forget to roll over the funds.
Another option is to keep the money right where it is with your former company. While the funds keep growing, the downside is that you can no longer contribute to the plan.
Making the right IRA rollover decision when you leave a company requires thoughtful planning and knowing what the financial implications are. You may want to consult an accountant or a financial adviser to help guide you in making the choice that is right for you.
