How to Avoid an IRA Rollover Mistake?

Understanding Retirement Plan Rollovers

If you are changing jobs or retiring, it’s important to know the rules regarding moving funds from your employer-sponsored retirement plan. The wrong move could cost you in income taxes and early withdrawal penalties.

2 Ways to Move Retirement Plan Assets Tax-Free

There are two basic ways to move retirement plan assets from one retirement plan to another with no tax consequences.

What Is a Direct Rollover?

With a direct rollover, your financial institution or plan directly transfers the payment into another plan or IRA. No taxes are withheld, and your account continues to grow tax-deferred.

What Is an Indirect Rollover?

With an indirect rollover, a check is made payable to you. You have 60 days to deposit it into a rollover IRA. After that, the entire amount is considered income and subject to taxes. You could also face a 10% early withdrawal penalty depending on your age, and indirect rollovers are subject to 20% withholding.

Example: How the 60-Day Rollover Rule Works

For example, if you had $10,000 eligible to rollover, your employer would withhold $2,000, and you’d get a check for $8,000. The $2,000 withheld counts as income taxes paid, but in 60 days, you still have to deposit the entire $10,000 in a rollover account, the $8,000 from your employer, plus $2,000 from your own resources.

Avoid Mistakes With Professional Rollover Guidance

To learn more about how to avoid complications with a retirement plan rollover, contact us today.