Retiring or leaving the company--How to Properly do an IRA Rollover
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How to Properly Do an IRA Rollover When Retiring or Leaving Your Job
Summary
When moving your IRA money, it's crucial to avoid common mistakes that could cost you up to 20% in taxes. Learn how to roll over your IRA correctly to avoid penalties.Introduction
Retiring or leaving a job involves making important decisions about your employer-sponsored retirement plan. Here’s how to handle an IRA rollover effectively.Your Options
When departing from a job, you have several choices for your retirement plan:1. Rollover into an IRA: Preserve the tax-deferred status and avoid penalties.
2. Take a Lump Sum: Pay income tax and potentially incur penalties.
3. Leave Funds with the Employer: If the employer allows.
4. Rollover to a New Employer's Plan: If accepted by the new plan.
Always check your specific plan’s “summary plan document” as it dictates what you can do. Consulting your financial advisor for guidance on your options is wise.
What is an IRA Rollover?
An IRA rollover allows you to transfer money from a retirement plan such as a 401(k) or 403(b) into an IRA. This helps maintain tax-deferred savings and avoid potential taxes and penalties.Advantages of an IRA Rollover
- Investment Flexibility: Enjoy a wider selection of investment options.- Beneficiary Benefits: Allows non-spouse beneficiaries to potentially stretch distributions over their lifetime, deferring taxes.
Considerations for Leaving Money with Your Employer
While keeping funds in an employer plan provides creditor protection under ERISA, recent laws extend similar protections to IRA rollovers.Combining with Other Retirement Accounts
You can combine rollover IRA funds with existing IRAs or other retirement accounts. The IRS allows such combinations, but be mindful of the new creditor protection rules.Completing Your IRA Rollover
When it's time to retire, consider these methods for moving your funds:Direct IRA Rollover
Instruct your employer to transfer funds directly to your new IRA custodian to avoid the 20% IRS withholding tax. This is the most recommended method.Payout by Check
If you receive a check, the employer will withhold 20% for taxes. You must then deposit the check and an additional 20% into a rollover IRA within 60 days to complete a tax-free rollover. Ideally, avoid this option to save hassle.Taking a Lump Sum Distribution
Opting for a lump sum usually leads to paying taxes and possibly a 10% penalty if you're under 59½. While there might be reasons for taking a lump sum, it's generally better to keep these funds intact for your future.In evaluating your options, consider your long-term financial goals and consult with a financial advisor to make the best decision for your retirement funds.
You can find the original non-AI version of this article here: Retiring or leaving the company--How to Properly do an IRA Rollover.
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