IRA Rollover / IRA Transfer
It is crucial to avoid negative tax implications when performing an IRA Transfer or IRA Rollover. If performed properly, your IRA will maintain its tax deferred status and there will be no tax liability for a direct rollover or direct transfer. First, it is necessary to understand the difference in terminology.
What is an IRA Transfer?
The term IRA Transfer is used to describe a transfer of assets from one IRA held at one financial institution to an IRA held by a different financial institution. An IRA Transfer from one financial institution to another via a custodian to custodian transfer is made tax free and there is no tax liability.
Learn more about an IRA Transfer.
What is an IRA Rollover?
An “IRA Rollover” or “Rollover IRA” is a tax free transfer of funds from an ex-employer’s retirement plan such as a 401k, 403b, 457, or Thrift Savings Plan to an IRA. An IRA Rollover occurs when an employee changes jobs or retires and as a result they are entitled to distribute or “rollover” their previous employer's retirement plan to an IRA.
Learn more about an IRA Rollover.
When is an IRA Rollover beneficial?
When changing employers the employee must decide what to do with funds in the old employer's retirement plan. One option is to leave the assets invested with the old employer, but most people prefer to take their retirement plan assets with them. The IRA Rollover is usually the best place to deposit those assets because when done properly it avoids the automatic 20% tax withholding on retirement plan distributions (IRS also imposes a 10% penalty on the distribution if done before age 59 1/2).
There is no limit on the amount that can rolled over into an IRA and when done properly there is no tax liability. Having one IRA Rollover holding all retirement assets is simpler and easier to manage than having several retirement plans after a few job changes. Another benefit is gaining more investment choices because some employer retirement plans such as a 401k have limited investment options. By comparison an IRA Rollover offered by BCM Advisors features a choice of thousands of different mutual funds and the guidance of a professional advisor who can tailor a blend of funds to suit your investment style and needs.
What happens if I take my retirement funds in cash when I leave my old employer?
Consider the case of a 50 year old with retirement assets of $100,000 who requests that his old employer terminate his plan and send him a check. A check for $80,000 will be sent because the employer is required by law to withhold 20% for future income taxes. Even worse, $100,000 will be added to his W-2 income so the $20,000 withheld probably wont be enough taxes. Finally a 10% penalty ($10,000) for a "premature distribution" (before age 59 1/2) is levied next April 15.
How do I avoid that tax catastrophe?
The simplest way is to establish an IRA Rollover and then ask the employer to send you a check for $100,000 via a "trustee to trustee" transfer. For example the check would be payable to the custodian FBO (for benefit of) your name. An IRA Rollover done in this manner would avoid penalties and taxes.
I already took my retirement funds in cash. Is there any way to get the 20% withholding back and avoid the 10% penalty?
Yes, but it's complicated and 60 days after receipt of funds it's too late to do anything. A BCM advisor can outline the steps if you qualify.
Why not simply transfer my old retirement plan to my new employer's retirement plan?
You can, but you surrender some of your financial privacy and compared to an IRA Rollover you might feel restricted by the rules and policies of the employer's 401k plan. An IRA has greater investment flexibility than your employer’s 401k.
An IRA Rollover is your own personal retirement account which you control and you are not affected by the financial health of your employer. Furthermore at BCM Advisors a financial advisor will work with you to structure a portfolio that suits your investment style and preferences and we offer a choice of thousands of mutual funds to maximize investment flexibility.
IRA Rollover Advantages
There are a number of advantages of rolling over an ex-employers retirement plan into an IRA.
- Control
- Investment Flexibility
- Investment Advice
Learn more about the advantages of an IRA Rollover.