Rollover IRAs
When you leave your company, what happens to your retirement assets? Well, that’s up to you. Moving your assets into a rollover IRA can help you keep the same tax benefits, avoid possible penalties and gain more control of your money.
Benefits of rolling into an IRA
Whether retirement is around the corner or many years away, rolling your assets into an IRA offers you a number of benefits, including the ability to:
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Keep tax advantages. Rollover IRAs can maintain the same tax benefits for your retirement plan assets. A Traditional IRA gives your money the potential to keep growing tax-deferred. A Roth IRA — like a Roth account in a 401(k) or 403(b) — can provide tax–free growth potential and tax-free withdrawals.
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Avoid taxes and penalties. By not cashing out, you won’t have to pay taxes or withdrawal penalties.
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Take control of your money. Rollover IRAs generally aren’t subject to as many rules and restrictions as retirement plans. You’ll have more access to your money.
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Widen your investment choices. Instead of being limited to the options in your employer’s plan, rollover IRAs allow you to choose from a huge array of investments.
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Combine retirement assets. If you still have accounts with previous employers, keeping track of the different rules and paperwork for each plan can be difficult. Use rollover IRAs to consolidate your retirement investments.
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Keep contributing. You can make contributions to a rollover IRA. The maximum amount is $5,000 for 2009. If you’re 50 or older, you can contribute up to $6,000 in 2009. Of course, you don’t have to roll over money to open an IRA.
Things to keep in mind
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Consider a direct rollover. The money should go directly from your old plan’s trustee to your rollover IRA’s trustee or custodian. Make sure the rollover funds don’t come to you to avoid mandatory income tax withholding.
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Are you rolling into a traditional IRA or a Roth IRA? Both types of IRAs give you tax-advantaged growth potential. When you make withdrawals from traditional IRAs, the money is taxable. With Roth IRAs, you already paid taxes on money going in, but qualified withdrawals, including earnings, aren’t taxable.
Money in a Roth 401(k) or 403(b) account can be rolled into a Roth IRA. Non-Roth accounts can be rolled into a traditional IRA or, if certain eligibility rules are met, into a Roth IRA.* Rollovers to Roth IRAs from non-Roth accounts are taxable. Unlike employer-sponsored retirement plan accounts and traditional IRAs, Roth IRAs are not subject to required minimum distributions over your lifetime.
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Indirect rollovers are subject to withholding. If you request a cash distribution, you can still initiate a rollover. However, 20% of the taxable portion of your distribution is withheld from your distribution for income taxes. You must then roll over the money into an IRA within 60 days of receiving your distribution if you want to keep the tax benefits. If you replace the withholding with your own money — you’ll get the withholding back from the IRS when you file your taxes — you can roll over your entire account value. If you don’t replace the amount withheld, it will be considered a distribution subject to taxes and possible penalties.
Bottom line: Avoid the hassle, and work with your employer to initiate a direct rollover.
Spend it or save it?
Measure the tax implications and penalties of staying tax–deferred and cashing out with the Spend it or save it calculator.
Take the next step
Find out how to start the rollover process to an American Funds IRA or how to initiate another transaction.
*To qualify for a rollover to a Roth IRA from a non-Roth account, your modified adjusted gross income must be $100,000 or less, and you cannot file separately if you’re married. These eligibility rules are scheduled to expire for 2010.
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