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Retirement Plan Rollovers

A rollover is not a taxable distribution when done correctly.

A rollover allows continued tax-deferred growth.

Once implemented, you cannot revoke a rollover election.

If you withdraw cash or other assets from an employer-sponsored retirement plan in an "eligible rollover distribution," you can defer paying tax on the distribution by rolling all or part of it over to a traditional IRA . You don't include the amount rolled over in your income until you receive it in a distribution from the IRA.

You can also roll all or part of your distribution to a Roth IRA . You'll pay income tax on the taxable portion of your distribution at the time of the rollover, but qualified distributions from the Roth IRA are free from federal income taxes.

Which plans must allow rollovers?

Certain employer plans must allow you to make a direct rollover from the plan. These are:

  • Qualified employer-sponsored retirement plans (401(k) & profit-sharing plans )
  • Qualified Section 403(a) annuities
  • Section 403(b) plans
  • Governmental Section 457(b) plans

Who else can make a rollover?

In addition to the plan participant, other plan payees may, in certain cases, be able to roll over distributions from employer plans:

  • Qualified domestic relations order (QDRO) payee.
  • Surviving spouse beneficiary.
  • Non-spouse beneficiary. You may be able to roll over all or part of an eligible rollover distribution to an inherited IRA.

Direct rollovers vs. Indirect rollovers

Rollovers can be direct rollovers or indirect rollovers. The distinction is important because indirect rollovers can cost you a lot of money in some cases. A direct rollover is usually a better option, and in some cases a direct rollover is the only option.

Direct rollovers

You can choose to have all or part of an eligible rollover distribution paid directly to a traditional IRA, or (if you qualify) to a Roth IRA. With a direct rollover, you never actually take receipt of the retirement plan funds. The funds go directly from the old plan trustee to the trustee/custodian of the IRA or new plan. For this reason, a direct rollover is often referred to as a trustee-to-trustee transfer.

Indirect rollovers ...could be costly

With an indirect rollover, the trustee of your old employer plan distributes the funds to you, and then you transfer them to the trustee of your IRA or to the trustee of another employer plan. There are some complications and potential pitfalls with indirect rollovers. In general, it is best to avoid indirect rollovers and utilize direct rollovers instead.

With an indirect rollover, the administrator of your old plan must withhold 20 percent of the taxable portion of the distribution paid to you for federal income tax. The IRS simply assumes that the distribution will be a taxable distribution, not a tax-free rollover.

Income tax consequences of doing a rollover

As discussed, a timely and properly completed rollover is treated as a tax-free transfer of retirement assets. However, if an indirect rollover is not completed within 60 days of initiation, the portion of the distribution that is not rolled over will generally be treated as taxable income to you. In addition, if you are under age 59½ and do not qualify for an exception, the taxable portion of your distribution may be subject to a 10 percent federal premature distribution penalty tax on the distribution (and possibly a state penalty as well).

*In addition to rolling over your 401(k) to an IRA, there are other options.  For additional information and what might be suitable for your particular situation, please contact us.  Options might include:

-Leaving the money in your former employers plan, if permitted.

-Rolling the asset over to a new employers plan, if available and permitted.

-Liquidating the account

Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.

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