Retirement: What is a
rollover IRA?
If you move your assets from
one investment to another, it's called a rollover. For example, if you
move money from one individual retirement account (IRA) to another IRA,
that transaction is a rollover. A rollover IRA is an individual
retirement account you create with tax-deferred assets you move from an
employer sponsored retirement plan to a self-directed investment
account. If you arrange for a direct rollover (or a transfer), the trustee of
your employer's plan transfers the assets to the trustee you select for
your IRA. In that case the total value of the account moves from one to
the other.
If you handle the rollover yourself, by getting a check from your
employer's plan and depositing it in your IRA, your employer must
withhold 20% of the total to prepay taxes that will be due if you fail
to redeposit the money in a tax-deferred account. That forces you to
supply the missing 20% from another source to meet the deposit deadline.
Transfer vs. Rollover:
You can transfer from one IRA to another similar IRA, or if you leave
your job you can transfer your 401(k) into an IRA if you wish. A
transfer are made directly from one custodian or trustee to another,
without money being distributed to you. Transfers can be done as often
as desired without limitation, and it is the usual procedure when moving
an IRA from one sponsor to another.
With a rollover, on the other hand, the funds are
actually distributed to you. IRA funds can be withdrawn tax-free and
penalty-free for 60 days, provided the full amount is returned to the
account within this time period. The money can be returned to the same
account or to a new IRA. In effect, this is like being able to take a
short-term, interest-free loan from your IRA. However, you can do this
just once in any 12-month period. If you don't replace the money within
60 days, you will owe income tax on the withdrawal and generally a 10%
penalty if you are under age 59 1/2.
Most distributions from qualified corporate retirement
plans, Keogh plans and 403(b) plans can be rolled over into an IRA
without owing income tax on the distribution, as long as the
reinvestment is made within 60 days after receipt. A "rollover IRA" is
usually kept separate and not combined with a regular IRA. The law
permits your “rollover IRA” to be rolled over again at some later date
into a new employer’s pension or profit sharing plan. But you are not
allowed to do this if you have ever made regular IRA contributions into
your "rollover IRA." Also, your company will withhold 20% of
distribution made to you from your employer sponsor plan, but you must
come up with that 20% and rollover to an IRA or you'll be taxed on that
20% plus early withdrawal penalty might apply. For example, you have
$10,000 in your 401(k) and choose to take the distribution instead of a
trustee to trustee transfer. You company will withhold $2,000 (which get
back when you file your tax return) and give you a check for $8,000. But
in order to avoid taxes and possible penalty, you need to deposit
$10,000 into your "rollover IRA".
IRA
Rollover -
The "rollover" is probably the most
misunderstood of the two. I will attempt to make this explanation as
clear and concise as possible. The IRS allows the IRA account holder to
"take possession" of the IRA money and do whatever the person wishes to
do with the money, as long as the funds are redeposited in
another "qualified" plan within 60 days of the distribution
date. The IRS allows this type of non-penalty withdrawal once
per year. If the funds are not redeposited within the 60 day period,
the withdrawal is treated as a "premature withdrawal" with applicable
taxes and penalties. The salient point to remember is that the IRA
holder is only allowed to "take possession" of the funds once
per year, and they must be redeposited within 60 days of
the distribution date.
IRA
Transfer -
IRA Transfers, on the other hand, do
not pass through (technically speaking) the IRA account holders
hands. This type of IRA asset transfer occurs directly between
the custodial organizations. There is no limit on the number of
"direct transfers" which can be effected each year. The point of
emphasis for determining whether or not a transfer is a "Rollover" or a
"Direct Transfer" is how the check is made out. If a check is
disbursed from an IRA made out to the individual only, it is considered
a "rollover". If the disbursement check is made out to another
institution, for the benefit of the IRA account holder, the
disbursement is considered a "transfer".
Notice that the primary point of
interest, for the IRS, is not where the disbursement is mailed,
or who receives the disbursement, but rather how the
disbursement check is made out. If the transfer is effected directly
between the custodial organizations via electronic means, then
obviously, it would be considered, for tax purposes, a direct transfer.
Next==>>
Converting and
Recharacterizing of an IRA
It's good to have money and the
things that money can buy,
but it's good, too, to check up once in a
while and make sure
that you haven't lost the things that money
can't buy.
-- George Horace Lorimer --
Table of
Contents:
-
What Are Retirement Accounts?
-
Employer Based
Retirement Plans
-
401(k) Plans
-
Individual Retirement Accounts (IRAs)
-
Roth IRA
-
What is a Rollover IRA?
-
Converting and
Recharacterizing of an IRA
-
Education IRA & SEP IRA
-
Self Employed Retirement plan: Keogh
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