 | | | The Rollover IRA: Taking It With You | | When you change jobs, you probably won't be able to take your computer with you. But fortunately, you can take the money you have in your retirement account. | |
| One of the most convenient and flexible options for dealing with a retirement plan from your former employer is to transfer the money to a Rollover IRA. In essence, a Rollover IRA is a Traditional IRA where you can park the cash you're transferring from your old employer's retirement account. So, you get most of the benefits of the Traditional IRA (the exception is a deduction on your tax return). Foremost among these, of course, is the fact that the money you invest in a Rollover IRA accumulates tax-free until you take it out in retirement, just as it does in a defined-contribution retirement plan. | |
| However, unlike your old (or new) plan, you can open a Rollover IRA with just about any investment firm, including mutual fund companies, insurance companies, and online brokers. You're allowed to invest the money in stocks, mutual funds, bonds, and other types of investments. That's why the Rollover IRA is your most flexible choice when leaving a job. | |
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Here's how are some guidelines to follow:
If you want to roll over a company retirement plan to an IRA, you'll need to contact your company's human resources department to obtain a form to do a "direct rollover." A direct rollover (your employer issues a check directly to your new retirement account) allows you to avoid the mandatory 20% federal income tax withholding on withdrawals from tax-deferred retirement plans.
You'll need to establish a traditional (or "rollover") IRA at a brokerage firm of your choosing.
Your company will either transfer the funds electronically to your IRA account or send you a check made payable to the new custodian; the funds, in turn, can be deposited into your IRA account.
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| You don't have to rollover your balance. You usually can keep it in the existing plan, which is not a bad option if you like your investment choices and are happy with how the plan is being administrated. Most plans, though, require a rollover if your balance is less than $5,000. You also may be able to rollover it over to your new employer's plan, if one exists and that new plan accepts rollovers. One thing you should try to avoid, however, is taking a distribution, as various penalties and taxes may be assessed. | |
| Restrictions | |
| Rollover IRAs do have a few restrictions, though. First of all, you need to complete a tax-deferred rollover within 60 days of receiving the assets from your former plan (the IRA may waive that 60-day requirement under certain circumstances). | |
| Second, if you commingle, or invest money that's not from a 401(k) or similar retirement plan, you'll lose the right to transfer those investments into a new employer's retirement plan. So, most financial planners recommend you open another retirement account separate from your Rollover IRA if you plan to continue investing for your retirement, say through annual IRA contributions. | |
| In the same vein, if you squirreled away money you'd already paid taxes on into your retirement account, you can't bring that over to your Rollover IRA. Instead, you'll have to invest that money in a taxable account. | |
| Another drawback to a Rollover IRA is that you can't take a loan from it as you can from some employer-sponsored retirement plans. Rollover IRAs are also subject to the same withdrawal limits as other tax-deferred retirement accounts. So, if you take any money out before you turn 59 1/2, you'll pay a 10% early withdrawal penalty in addition to taxes. | |
| And lastly, you are only allowed to make one IRA rollover per year. | |
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