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Everything You Need To Know About An IRA Rollover

September 28th, 2020 | Leave a comment.

For Americans, the full retirement age is 66 years and 2 months. This means, if you’re considering a career change what happens to your 401(k) plan is very important. One of the preferred options is to roll your 401k into a Roth IRA or a traditional IRA. Here is everything and more that you should know about an IRA rollover.

The case for IRA rollovers

Should you transfer funds from your 401(k) to an IRA account? An IRA is advantageous in that it provides you with greater control as well as presenting you with more investment options. Your asset class choices are not limited and you’ll now be able to invest in real estate, oil and gas should you opt for the self-directed IRA route. Generally, there are more pros with an IRA rollover than simply leaving your 401(k) parked with your former employer.

Initiating an IRA rollover

IRA rollovers can either be direct or indirect. Direct rollovers are less complex and are done without the need for you to personally transfer the funds. Generally, a check is written that allows the rollover to happen to the new account without your immediate involvement.

Indirect rollovers on the other hand are cumbersome because 20% of the money from your 401(k) is withheld and sent directly to the IRS. Your account custodian then writes you a check for the remaining 80%. However, to ensure that the rollover amount in your new account is 100% of the sum total leaving your previous retirement plan, you will have to add the 20% given to the IRS from your own pocket. Failure to do so will attract tax plus a penalty.

Now, which account should you roll over into between a traditional IRA and a Roth IRA account?

Traditional IRA rollover

Traditional IRAs are ideal for an IRA rollover if you are currently in a high tax bracket and see yourself having to tap into these retirement funds in the next five years. If you fall into this category, a traditional IRA may be a better option because you’ll not be taxed immediately.

Roth IRA rollover

Funds rolled over into a Roth IRA are subject to immediate taxation. However, if you don’t withdraw funds from your Roth IRA before five years are up, your after-tax contributions and additional earnings will be tax-free.

Dual IRA accounts

You may be fortunate and not have to choose between which account to have. If your plan administrator allows it you can split your funds between a traditional IRA and Roth IRA account in a ratio that’s comfortable for you e.g. 60% in a traditional IRA and 40% in a Roth IRA.

Things to note

a) Rollover grace period

If you initiate an indirect IRA rollover, you have a 60-day window to roll over the funds from your 401(k) into your new brokerage account. If you fail to rollover within this time-frame you may be subject to paying tax on the entire amount as well as face an early 10% withdrawal penalty.

b) How much to roll over

Do you have to roll over your entire balance into the new account? No, you don’t have to move all the funds in your 401(k) to your new qualified account. This is worth noting especially if you plan to roll between a traditional IRA and a Roth IRA.

c) One IRA rollover per year

You can only rollover funds once in a 12-month period if you’re moving them from a traditional IRA into any other IRA type account such as a SEP-IRA or SIMPLE IRA. This rule does not apply, however, when you’re rolling over funds to or from your employer’s sponsored retirement plan using a Direct Rollover.

Need help with an IRA rollover?

Reed Financial Group provides professional financial advisory services. With over 20 years of experience guiding investment portfolios and providing advice on retirement decisions, we’re more than happy to help you figure out IRA rollovers.

Contact us for more information.

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