Rollover vs. Transfer
An IRA rollover is the movement of funds between 2 types of retirement plans that may be different, such as from a 401(k) plan to an IRA. Rollovers may be subject to federal income tax unless all requirements are met. Here are two general requirements for a tax-free rollover:
● You must complete the rollover within 60 days of receiving the funds (all IRAs)
● You may only roll over funds from the same IRA once every 12 months (Traditional and SEP IRAs)
An IRA transfer is the movement of funds between the same types of accounts, such as from one Traditional IRA to another Traditional IRA, where there is no distribution to you. The money is transferred directly from one financial institution to another on your behalf and is also known as a trustee-to-trustee or custodial transfer. Transfers can take place as often as you like, and they are not taxable.
More about rollovers
Direct payment rollover
If you choose to receive a direct payment of your funds, 20% of the funds may be withheld for taxes. You can recover the withheld amount if you deposit your assets into an IRA within 60 days. The deposit must be equal to the amount of your distribution, plus the 20% that was withheld. When you fund your Rollover IRA with 100% of your distribution, you will receive a refund for the withheld amount in the form of a tax credit when you file your tax return.
If you do not make up the difference of the withheld amount, the IRS will consider it a distribution and will tax it as income. The amount may also be subject to an additional tax. Please consult your tax advisor.
You can avoid the possibility that 20% of your rollover funds will be withheld for taxes by choosing the direct rollover option. This is where you have the funds rolled over directly from your employer’s qualified retirement plan into your IRA.
When you leave your job
After leaving your job, you can:
• Consolidate your funds into one IRA
• Transfer your funds from one workplace plan to another
• Leave your assets in your former employer’s plan, or cash out
When to consider consolidating into an IRA:
• If you want a more complete view of your financial picture that is easier to maintain
• If you don’t like the restrictions that your workplace savings plan may have
• If you need different products than what your current plan provides
• If you would like the ability to withdraw funds penalty-free for qualified home or education expenses, and your current plan does not allow it
• If you would like the opportunity to convert to a Roth IRA for tax-free growth
When to consider consolidating into a 401(k) savings plan with your current employer:
• If you are planning to take out a loan from this plan
• If you want to defer your required minimum distributions because you are older than 70½, you are still working, or your 401(k) plan doesn’t require distributions at 70½
• If you want to protect your assets against creditors and your situation entitles your funds to greater protection in an IRA than a 401(k) plan
"Cashing Out" of a 401k plan
You may consider cashing out of your 401(k) plan when you leave your employer. While it may be tempting to get immediate access to all your 401(k) funds, this decision comes with significant implications.
A cash out could cost you.
• You must pay applicable federal, state, and local tax
• A large distribution from your 401(k) plan may place you in a higher income tax bracket for the year
• If you cash out of your 401(k) account before age 59½, you would most likely have to pay a 10% early withdrawal penalty
We recommend you talk to a tax professional for advice.