Rollover IRA

Chances are you will have to roll over a retirement account at least once in your lifetime. Here's what you need to know in order to complete a successful rollover.

If you ask, your company will send you a check for the full vested balance of your account – but beware! If the company makes the check out to you, 20% must be withheld for taxes and you will have to make up the missing 20% out of pocket and even pay a 10% penalty on the withdrawal if you’re under age 59½. In addition, you won't get the withheld money back until you file your taxes the following year (and that assumes your salary withholding and any other tax payments for the year exactly equal your tax bill). To avoid the 20% withholding, you must make a "direct” rollover, also known as a "trustee to trustee" rollover. This simply means the administrator of the retirement plan at your old company makes your distribution check payable to the trustee/custodian of your rollover IRA, the account that you want to receive your rollover funds. The check will usually be made payable something like, "Sterling Trust Company, Custodian for benefit of John Q. Public IRA." The next step is to notify your former employer's retirement plan administrator that you wish to make a direct rollover. The plan administrator will usually require you to fill out its distribution/rollover form, which will include a place for you to give instructions on how the distribution check should be made payable. When you receive the check, simply deposit it with the custodian of your rollover IRA within 60 days. To meet the 60-day rule, start counting on the day after you receive the check and include the day you deposit the money into your IRA. For example, if you get the check on September 1, you must deposit the rollover funds in your IRA on or before October 31. There is no extension for weekends or holidays.

If you take cash from your qualified retirement plan, you must roll over cash into your IRA, rather than some other asset of equal value. This is known as the “same property rule” and it goes for rolling over from one IRA to another or from a qualified retirement plan to an IRA. For example, you cannot use cash withdrawn from a retirement plan or IRA to buy a stock and then attempt to roll over the shares. You would want to avoid this maneuver, unless you are ready to pay taxes on the withdrawal and a 10% premature penalty if you are under age 59½. Now if you withdraw shares of stock from a qualified plan or IRA account, it’s perfectly okay to rollover the shares into your IRA – in fact, it's required. This means you can not sell the stock and then roll over an equal amount of cash, nor can you rollover different shares of stock with an equal value. The basis for a tax-free rollover is that you rollover exactly what was distributed to you from the plan within the permitted 60-day window.

Changing jobs creates a great opportunity to roll over from your former employer’s plan into an IRA. Plus, it will usually provide you with more investment options than you might otherwise have if you were to leave the money in your former employer’s plan or roll it over into your new employer's plan.

Let our team of IRA professionals assist with your IRA rollover needs. Give our IRA Services Group a call at 800.955.3434, option 2.