If you are asking the question, “What is a rollover IRA?” then you are probably thinking about leaving your current company for other employment (this is usually the only scenario where someone would need to know what a rollover IRA is).
A rollover IRA is a type of individual retirement account that is designed to receive your funds from a company retirement plan when you leave. You want to use a rollover IRA so that you do not have to pay early withdrawal penalties for taking your money out of your retirement fund before you retire.
The IRS has made it easy for you to continue to save for retirement even if you are no longer employed with a company that offers a retirement plan. You are able to roll the balance of your company-sponsored retirement plan into an IRA without penalty or tax implications. No matter what type of retirement plan you have through your employer, you will likely be able to roll your money over to an IRA. Here’s how.
What is a Rollover IRA? – The Rollover Process
When you leave your company, you have 60 days to roll over the money from your company retirement plan to an IRA. You can roll over funds from accounts that belong to 401k, 403b, profit sharing, employee stock purchase (ESOP), and thrift savings plans. You can also roll over funds from one IRA to another if you choose to, although this is rarer than a company rollover. If you already have an IRA account, you are able to roll the funds from your company retirement account into it.
When you are ready to roll over your funds, it is best to contact your company’s plan administrator to initiate a direct rollover. This is much easier than it is to roll the funds over yourself because once you have the money in your hands you have to make the effort to roll it over. Sometimes, circumstances can prevent you from making this transaction and you will end up paying taxes and an early withdrawal penalty on the money. If you have your administrator roll the money over directly, you never handle the money and it will remain safe for your retirement.
In addition, if you roll the money over yourself, you are subject to a 20 percent withholding to cover taxes and penalties if you fail to roll over the entire balance of your account within 60 days. Once you roll over 100 percent of your account to the IRA, the 20 percent that was withheld will be returned to you. Keep in mind that you have to come up with the 20 percent that is being withheld from other funds to roll over 100 percent of your account. If you are unable to do this, you will end up paying taxes and penalties on the 20 percent as income.
Why Rollover Your Funds?
You might be thinking that now that you know what is a rollover IRA that you aren’t sure you want to roll over your funds. Maybe you think it’s too much work or maybe you think you need the money now instead of later when you retire.
Well, in most cases, it is far better for you to roll over your funds than it is to take it out and use it now. For one thing, you will pay hefty penalties for pulling the money out early. For another thing, you will no longer have that money set aside for your retirement. Your goal for putting money in your company-sponsored retirement account was to ensure you have an income stream when you retire. If you pull it out now, you won’t have that income when you leave the workforce for good.
Another reason a rollover IRA is useful is because it can help you to retire early. If you need to withdraw your savings before age 59-1/2, then using an IRA rollover can be a good way to get all your retirement money into one spot and then take out an SEPP.
Rolling over your retirement account into an IRA is a great way to ensure you don’t use the money for anything other than retirement. Just be sure that if you roll over your funds to an existing IRA account that the IRA is already funded with pre-tax dollars. You do not want to mingle pre-tax money with after-tax money because it will be difficult to disperse when you retire.
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