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IRA Rollovers

What Does IRA Rollover Mean?

An IRA Rollover is a transfer of funds from a retirement account into a Traditional IRA or a Roth IRA. This can occur either through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account. If the transfer is done by check, there will be a 20% withholding penalty applied before the custodian issues the check. To avoid the 20% penalty, the rollover must take place directly from one custodian to another.

Many IRAs will only allow one rollover per year on an IRA to IRA transfer. The one-year calendar runs from the time the distribution is made. Most rollovers occur when people change jobs and wish to move 401(k) or 403(b) assets into an IRA. Most IRAs offer more investment choices along with a continuation of tax-deferred gains and income.

IRA rollovers can occur from a retirement account such as a 401(k) into an IRA, or as an IRA to IRA transfer. A rollover can occur into a Roth IRA, provided that the individual’s adjusted gross income is below a certain level in the tax year in which the rollover occurs.

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I Changed Jobs, Should I Rollover My 401(k)?

The short answer is… it depends. Click the link below for your particular situation:

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Can I Rollover Different 401(k) Plans Into A Single IRA?

Yes. You can consolidate different 401ks, IRAs and other retirement accounts into one IRA account, provided that all funds are pre-tax. The benefits here are you’ll be able to exercise better control over your investments, expand your investment choices and lower administrative fees.

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Can I Transfer 401(k) Assets out Of My Employers Plan While I’m Still Working?

The answer is maybe. There is a little known technique called an “In Service Transfer” provision found in many employers “Summary Plan Description Document”. Many human resource departments don’t know if this provision is incorporated in their retirement plan documents. What this provision allows is a ‘penalty free’ transfer of all or a portion of your retirement plan assets to your own IRA. Often, there is an age or years of service requirement before money can be moved.

You have a right to ask for your company’s “Summary Plan Description Document” so you can determine if you are eligible. The main benefit of this is the expanded choices you will have to invest assets in your IRA vs. the limited options provided by your company’s 401(k) plan.

Consult a financial advisor to outline the advantages and disadvantages of this approach before you transfer assets.

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Download LPL’s Retirement Portability Chart

The IRA Rollover and How to Avoid the 20% Tax Trap

As retirement nears OR you change jobs … money decisions become increasingly major. One big decision concerns what to do with the money in your company retirement plan.

The Direct Rollover – For many individuals, the most attractive option is an IRA rollover. In other words, you transfer the money from your 401(k), 403(b) or 457 plan into an IRA. It is not hard to accomplish, provided you have the guidance of a qualified financial consultant. (Restrictions, limitations and fees may apply)

Basic steps – When you leave a company, you usually have three options with your retirement plan: you can leave the money in the plan, roll it over into a new plan (if you elect to keep working for a new employer), or do a direct rollover into an IRA. 
A direct rollover is not the same thing as a direct payment to you. Yes, your employer can actually write you a check for the full amount of your 401(k) account, but 20% of that money will be withheld for taxes.

Do you want to avoid that 20% tax trap? A “trustee to trustee” rollover, works like this: your employer writes a lump sum check not to you, but in the name of the trustee or custodian of the IRA that you are creating to hold the funds. (There is almost always a form to be filled out, on which you can state the specific instructions for the distribution check.)

Your company sends you the check payable to the IRA trustee, with no withholding, and you have 60 days to deposit it in the IRA (day 1 is the day after you get the check). (Sometimes a wire transfer of assets occurs instead, between one investment custodian and another). If you don’t complete the direct rollover in 60 days, you will pay tax on the entire amount. (There’s no grace period for weekends or holidays).

Is it time to roll over your retirement money? If that time is here or getting closer, you need to be very careful with what could possibly be the largest lump sum you ever receive. Be sure to ask a qualified financial consultant about your IRA rollover options today.

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401k Rollover – Making the Right Choice

Some people think they have to cash out their 401(k) upon leaving a job. Others think they must “roll it over” into a new 401(k). Still others believe that they must leave the 401(k) where it is. The big question is which option is the right option for YOU?

You could leave your money where it is. Should you? Well, it depends. If you feel the plan has good investment choices and the annual fees are reasonable, leaving your money there to mature may be a good option for you.

If your new employer offers a 401(k), you could choose to “roll” your money into that plan, but then you will be limited to the new plan’s investment options. So should you? Once again, it depends. You will want to look into the structure of the new plan, the fees and the investment options.

If managing where your account is held and how it is invested is important to you, moving your money into an IRA rollover account could give you a great deal of flexibility (restrictions, limitations and fees may apply). It also offers you more distribution options, once you are eligible. Additionally, you could open a brokerage account or purchase a CD, provided the account is titled as your IRA Rollover Account.

You may choose to cash out your 401(k) upon leaving a job, but that could be costly. First of all, you could be hit with a 10% IRS penalty if you are younger than 59½ and secondly, your distribution is considered ordinary income and subject to income tax.

Fighting temptation now could lead to big rewards later …

For example, let’s assume your 401(k) check is for $30,000 and you cash it in to buy that new $30,000 car. In a 25% tax bracket, plus the 10% penalty tax, you would net $19,500 after taxes (tax will vary depending on your particular circumstances). Another hidden cost is the opportunity for that $30,000 to continue to grow. At age 30, the $30,000 left in your retirement account at a 7% return, could be worth $320,000 by age 65. That $320,000 paid out to you in retirement at 5% over 20 years, could generate over $500,000 in income. In other words, that early withdrawal of $30,000 could cost you $500,000 in opportunity costs. This example is a hypothetical. Figures would change with investment performance.

Rollovers can be hazardous to your financial health so it is important to make the right choice.

If you would like to learn more about your options, please call us at (781) 861-9700.