If you change jobs or retire, you might find yourself having to rollover your retirement plan. Leaving an old plan to be managed under the strict rules of your former employer may not be to your advantage. A tax-deferred rollover is the best way to move money from one retirement account to another when done correctly. If not done correctly, you could wind up paying tax penalties. Consider the following four retirement rollover strategies that will help you avoid tax penalties on your retirement savings.
Rolling Over Your Workplace Retirement Plan
Before you leave or immediately after leaving your job, you need to request a distribution form from your employer. To fill out the paperwork, you need your new retirement account information. If you don’t have it yet, open up a new IRA. You can either park the money there temporarily until you are eligible to participate in another workplace plan, or leave it there for the long-term.
Determining the Best Place for Your Rollover Money
Comparison-shop and consider whether your new employer plan would be better than an IRA for your rollover money. An IRA offers advantages that an employer plan usually doesn’t; namely, more flexibility and investment options, so you might benefit more by leaving your funds in the IRA. However, if your new employer plan offers matching funds, by all means contribute your new retirement contributions to that plan because you are receiving an instant return on that investment. After maxing out your contributions, you can add funds to your IRA.
Completing Your Retirement Rollover
There are two ways you can go about doing your retirement rollover:
- You could have the funds made payable to you and deposit that money into your bank account. Within 60 days, you need to transfer it to your new retirement account.
- You could have the funds sent directly to the custodian of your rollover account.
Option 2 is usually a better strategy, because whenever a retirement distribution is paid to you personally, the trustee is required to withhold 20% and send it to the IRS — yes, even if you will definitely be completing your rollover within 60 days. Unless you are able to replace the withheld amount out-of-pocket, your rollover will only be 80% of the original amount. You don’t lose the 20%, but you won’t see it again until you file your federal taxes at the end of the year, when it will be refunded.
Keep Within the 60-Day Deadline
Make sure that you complete the rollover within the 60-day deadline if you aren’t doing a direct rollover. If you miss the deadline, you will be required to pay income tax on your retirement distribution. And if you are under age 59 1/2, you will also get hit with an early withdrawal penalty for a non-qualified withdrawal of 10 percent.
One misconception, held even by some CPA’s we have found, involves rolling over a 401(k), 403(b), or TSP into an IRA funded by an annuity. Contrary to popular belief, you do NOT cash out of the IRA to “buy an annuity instead.” The very simple thing you do is to roll over to a self directed IRA. Your IRA is the buyer of the annuity. Therefore there are no taxes involved in opening your new Annuity IRA.
Many people are rolling over all or part of their current retirement plans or IRAs to an IRA funded by a fixed index annuity with a guaranteed income rider.
Because fewer people are retiring with pensions, this can be an effective way to ensure that you and your spouse will have a quality source of perpetual income that lasts as long as you live, like a pension. A carefully selected annuity used for your rollover protects your principal against loss from the market, while growing your income benefit. With bonds at historic low rates, this can be a wise choice.
A Kiplinger contributor, Steve Jurich heads IQ Wealth Management in Scottsdale, Arizona, a registered investment advisor. He is a Certified Annuity Specialist and a Certified Income Specialist and the author of the Amazon best seller, Smart Is The New Rich. You can hear his daily radio program, Mastering Money, broadcast on Money Radio in Phoenix (1510AM, 105.3FM) or choose from his podcasts
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