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 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 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. 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withdrawn after age 59 ½.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 a 10% 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 20% IRS
withholding tax.
Payout by Check-You can avoid the 20% IRS withholding tax on a
payout by check from your employer if you deposit the check plus 20%
into a rollover IRA within 60 days.
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