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Your Options for IRA Rollover

If you change from one job to another — that is, from one employer to another — an IRA rollover may occur. Usually, you are entitled to rollover your previous employer’s retirement plan, such as the 401K, to an IRA. It is very important to be familiar with the IRA rollover rules when you plan to do a rollover — this way, you will be able to avoid negative tax implications, and you will be spared from paying unnecessary taxes. Knowing the rules is the number and most important thing that you have to do before you make any move for your IRA rollover plan.

Basically, there are different rollover options which you may consider, and these are the following:

  1. First, there is what we call a “cash distribution”, which happens when you prefer to receive a cash distribution and make the check payable to your name. However, you must be very careful with this kind of option, because a distribution check which is payable to your name may be subject to federal and state income taxes — and obviously, this is something that you do not like to happen, most especially if you are under the age of 59 and 1/2, as cash distribution made at this age bracket are also subject to 10% early withdrawal penalty on top of the taxes.
  2. Indirect rollover is also another option for IRA rollover. This is when you opt to take the money from your retirement funds in the form of cash distribution, and deposit the money into the IRA plan within the 60-day period. In order to avoid unnecessary taxes and early withdrawal penalties, it is very critical to deposit all funds from another retirement account into the new IRA plan within 60 days. If, for any reason, any amount is not rolled over to the new IRA plan within the allotted 60-day period, then it will be subject to taxes and possible penalties.
  3. You may also opt to do a direct rollover, which you authorize your employer to make your check payable to your new chosen IRA custodian. This is also known as trustee-to-trustee rollover, and is believed to be the safest and best IRA rollover option available, because there are absolutely no taxes and penalties for such.

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