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Your Guide to Retirement Planning.
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In this time of job changing and downsizing, you will probably need to know what to do with your company sponsored retirement plan at least once before your retirement. Once you leave a job for whatever reason, you need to make a decision as to what to do with your retirement plan. You can either choose to rollover the plan into an IRA or take the lump sum and pay the tax and penalties. Some companies also allow you to leave the retirement plan intact until you reach retirement age. This article discusses the choice of a rollover into a traditional IRA.

What is a Rollover?

Rollover means to move money from a qualified retirement plan such as a 401(k) into an IRA. If you receive a payout from your company-sponsored retirement plan, a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status of your retirement savings and will avoid penalties and taxes.

Making Contributions to a Rollover IRA

The rollover IRA is usually funded by the eligible distributions from a qualified company sponsored retirement plan. These distributions can be combined with an existing IRA or into a separate IRA. If you create a separate IRA for your rollover, you can easily move these funds to another employer sponsored plan in the future if the company allows this. It's a good idea to keep your rollover IRA separate from any other IRA's you might have because once you make contributions to a rollover that are not from a company sponsored plan, you lose the right to move this rollover to a company sponsored plan.

Distributions from a Rollover IRA

The distribution rules for a rollover IRA are the same as the rules for a traditional IRA. Contributions and earnings are taxed when withdrawn after age 59 ½. Withdrawals before the age 59 ½ are taxable and subject to an early withdrawal penalty with certain exceptions. Withdrawals must begin by the year after you reach 70 ½ to avoid penalties.

Direct Rollover-Your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the IRS withholding tax.

Before making any decision about your pension distributions, be sure to discuss your strategy with your financial planner or accountant.