Considering a Rollover? - What You Need to Know

Considering a Rollover? - What You Need to Know

If you have saved for retirement in an employer-sponsored retirement plan, like a 401(k) plan, or in an IRA, you’re probably aware that you can move those assets to another plan or IRA. But because these assets are held in “tax-qualified” accounts, certain rules apply when you take money out of these accounts. These rules are intended to prevent abuse of the tax benefits provided to retirement savings and to help workers preserve their savings rather than use them before retirement.  If you don’t understand these rules, you may be negatively surprised by the tax consequences of moving or distributing retirement savings. These complex rules differ depending on whether you have money in an employer plan or in an IRA. Here are some things you need to know if you are considering moving your retirement savings.

Moving Money Out of a Workplace Retirement Plan

1. Unless you have a financial emergency, you generally may only take money out of your employer plan account after you have stopped working for that employer or attained age 59½.

2. If you are required to take money out, such as required minimum distribution after age 72 or to correct an excess contribution, you cannot roll over that money to another tax-qualified retirement account.

3. If you request a "direct rollover" to another retirement plan or an IRA, there will be no tax consequences or cost to you, other than a processing fee.

4. If you choose to take money out of your employer plan payable to yourself, even if you think you will roll it over to another retirement plan or IRA later, there may be tax consequences.

• Your employer must withhold 20% of the taxable amount taken out of the plan and send it to the IRS as prepayment of federal income tax you could potentially owe on the distribution. You will receive only 80% of the amount you requested. However, 100% of the amount taken out of the plan must be included in your taxable income for the year unless you deposit that money into another retirement plan or IRA within 60 days. To avoid taxation on your distribution, you must come up with an amount equal to the 20% that was withheld and deposit that into the IRA or other employer plan along with the 80% you received. If you do not make up the 20% and roll over 100% of the amount that came out of your employer plan, you must include 20% withholding amount in your taxable income for the year, even though the IRS received that money. (Some states require tax withholding, as well.)
• If you are younger than 59½, any taxable amount distributed from the plan and not rolled over to another account (including the 20%) is subject to a 10% "early distribution" tax in addition to regular income tax.
• If you do complete a rollover of 100% of the distribution, you may receive a refund of some or all the amount that was withheld and sent to the IRS when you file your federal income tax return for the year.

5. Special rules apply if you are moving Roth contributions out of your employer plan or are converting pre-tax retirement savings into a Roth IRA.

Moving Money Between IRAs

1. You have total control over your IRA assets and can withdraw money from your IRA at any time.

2. If you request a "direct transfer" from one IRA to another IRA, there are no tax consequences and no timing requirements because you will not have access to these assets. You may hand-carry a check to another IRA custodian, so long as the check is made payable to the receiving institution for the benefit of your IRA.

3. If you take a distribution payable to yourself and later roll over the assets to another IRA or back into the same IRA, you have 60 days to complete the rollover and avoid any tax consequences.

4. Tax withholding is not required for IRA withdrawals. Your IRA custodian will withhold 10% of the amount distributed for federal tax unless you waive withholding or request another amount. (Some states require tax withholding.)

5. If you take money out of an IRA and roll it to another IRA within 60 days, you must wait one year before you can make another rollover out of an IRA. IRA transfers are not subject to this limitation, and neither are direct and indirect rollovers from an employer plan to an IRA.

6. If you keep any of the money distributed from the IRA, you must include the pre-tax portion (money that has not yet been taxed) in your taxable income for the year. The taxable portion will also be subject to the 10% early distribution tax if you are under age 59½, unless you meet an exception.

7. Special rules apply to Roth IRA distributions.

 Rollover Rules for Retirement Savings in an Employer Plan vs. an IRA

If you are considering moving your retirement savings, you may want to first seek guidance from a financial advisor to discuss your options and the tax consequences.