YOUR RETIREMENT CENTER
IRA Rollovers

Rollovers are a hop, skip, and a jump from conventional IRAs

You can move money in one traditional IRA to another traditional IRA without penalty, and without owing income tax on any earnings that may have accumulated. What you're doing is rolling over your IRA. You can move the money yourself, by getting a check for the amount in the existing IRA and depositing the check with the provider of your new IRA. Or you can have the institution with your existing IRA transfer the money directly to the provider of your new account.

If you roll over one traditional IRA to another traditional IRA, or one Roth IRA to another Roth, you have 60 days from the time you take the money out of the existing account to deposit it in the new account. If you miss the deadline or deposit only a portion of what you withdrew, you owe income tax on the amount you don't deposit and potentially a 10% early withdrawal penalty if you're younger than 59 1/2.

ROLLOVER IRAS You may also move assets in an employer-sponsored plan, such as a 401(k), 403(b), or 457 into an IRA if you retire, change jobs, or your employer ends the plan. Moving the money to an IRA means that your retirement savings can continue to accumulate tax deferred until you are ready to begin withdrawals or move the money back into a new employer's plan. This type of IRA is sometimes known as a rollover IRA.


AS ALWAYS, THERE ARE RULES
Like IRAs you roll over from one account to another, IRAs funded with retirement plan money are subject to some specific regulations. Following the rules postpones taxes and protects you from fees and penalties. And when you put money in an IRA, you assume more personal responsibility for keeping track of your investment.

Rule 1 DEPOSIT WITHIN SIXTY DAYS
First and foremost, the 60-day rule applies. If you put your retirement plan payout into an IRA, you have to deposit the full amount within the official time period - and the clock starts ticking on the date the check is received by you.

A bigger problem is that 20% of the payout amount is automatically withheld to prepay potential income taxes before you get the payment check. That means if you're going to deposit the full amount, you'll have to tap another source - like your savings - to come up with the 20% that's been withheld. You'll get the 20% back - after you pay your taxes for the year, which could be as long as 15 or 16 months later, provided you make the full deposit.

Worse yet, if you can't come up with enough to cover the full lump sum required, the amount that was withheld counts as a withdrawal, even though you never had the money. If you're not 59 1/2 yet, you owe the tax, plus possibly a penalty for early withdrawal.

There is a way to avoid this problem: Have your plan administrator transfer your payout to your IRA directly, rather than sending you a check. That way, no tax is withheld. But if you want access to the cash during the 60 days, you're stuck.

Rule 2 INVEST WISELY
 When you've moved the money from your old plan to your IRA, it's your responsibility to invest it to meet your long-term goals. One approach is to put it into a money market separate account with a variable annuity initially and move it gradually into other separate account funds you select. It's important, as part of the process, to diversify your portfolio to help reduce some of the risks of investing.
Rule 3 CONSIDER ANOTHER ROLLOVER If you take a new job where the employer offers a retirement savings plan that accepts rollovers from IRAs or former employer plans, you may choose to move your money into the plan. One thing to consider is the quality of the plan offerings, and whether you believe they will help you meet your objectives as well as the investments you've selected in your IRA. The rules allow you to move money from one type of plan - say a 403(b) - to another type - such as a 401(k) or 457. That increases your flexibility and allows you to consolidate your retirement savings in one place if you wish.

Rule 4 PUT AWAY PENSION PAYOUTS
You can put all or part of your lump sum pension or retirement savings plan payout in a rollover IRA. If the payout is made in a series of partial lump sums over a period of less than ten years, you can put some or all of those payments into a rollover IRA too.

 

A ROTH CONVERSION One way to take advantage of the tax-free income a Roth IRA provides is to convert your current IRA to a Roth. You'll owe the tax due on your earnings (and on your investment amount if you deducted your contributions), but no penalty. You're also eligible to convert a tax-deferred 401(k) or similar plan to a Roth IRA after you retire or leave the plan.

Beginning in 2010, there are no income caps limiting who is eligible to make a conversion. Even if you're not eligible to make an annual contribution to a Roth IRA, you can convert to a Roth IRA. In addition, for conversions in 2010 only, you may elect to pay the tax that's due with your 2010 return or pay half of what's due with your 2011 return and half with your 2012 return.

You'll probably want to get some expert advice on whether this strategy pays for you. The answer will depend on:

  • How much you have to transfer
  • Your current tax rate
  • Your age
  • The time until you plan to withdraw from the Roth
FUTURE CONSIDERATIONSYou can extend the tax-deferred life of your IRA by naming a living beneficiary rather than leaving it to your estate. That's because IRA withdrawals are based on life expectancy and an estate hasn't got one. So your account comes to a quick (and bad) end, with a tax bill to settle. It's an easy mistake to avoid.

As with other Roth accounts, you must keep an account created with transferred funds open for at least five years before you can take tax-free withdrawals. If you're not confident you can wait that long, it's probably not smart to transfer your funds, pay the tax due, and then withdraw early, only to be faced with more taxes (and potentially a penalty).
Remember that married people who file separate tax returns are not eligible to roll over to a Roth. A tax adviser can help you decide whether you should file jointly for one year in order to move your IRA. Another thing to consider is that the tax on the amount you're moving is due in the year the IRA is moved. That could add up to a lot of money if your account balance is substantial. And it could bump you into a higher tax bracket, increasing what you owe even more. But if you have had significant losses in your IRA before you move it into a Roth, you may owe very little tax or none at all.

 

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