Save time and money by learning IRA rollover basics

Published 7:00 pm Tuesday, April 10, 2012

(ARA) – The two things that everyone could use more of are time and money. One way to help free up some of both is by rolling over your existing retirement assets into an Individual Retirement Account (IRA). An IRA rollover may give you greater control of assets spread across multiple accounts and potentially offers improved diversification, flexibility, guidance and service. This could save you money in fees and other costs from different accounts as well as cut down on financial paperwork and other headaches from dealing with multiple assets.

Here are some basics from Thrivent Financial regarding what you need to know about rolling over to an IRA.

What is an IRA rollover?

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An IRA rollover is the act of funding an IRA with assets moved from an existing tax-qualified retirement account, a pension plan, a profit sharing plan, 401(k) plan, 403(b) plan or another IRA (with the exception of a Roth IRA, which can only be rolled into another Roth IRA) without penalty or tax withholding, for continued tax-deferred growth potential.

Who can open a rollover IRA?

You can roll over money from a former employer’s retirement plan (profit sharing, 401(k), 403(b), Roth 401(k) or Roth 403(b), etc.) to an IRA if you experience one of the following triggering events as permitted by the plan:

* Change of employer

* Termination of an employer’s existing plan

* Retirement

* Reaching age 59 1/2

* Disability

* Divorce

* Death

You may also roll over or transfer assets from most traditional, Roth, SIMPLE and SEP IRAs into an IRA. The assets in the old plan or account are “rolled over” into an IRA and retain their tax-deferred growth potential.

Why move funds into a rollover IRA?

There are potentially four primary benefits in rolling tax-qualified retirement savings over to an IRA. These include:

1. Easier management of retirement assets. Consolidating multiple tax-qualified workplace retirement accounts into a single IRA may make it easier for you to manage your retirement assets. Instead of piecing together multiple statements to find your overall investment performance and balance, just one statement does the trick.

The U.S. Department of Labor reports that baby boomers born between 1957 and 1964 held an average of 11 jobs from age 18 to age 44, according to the National Longitudinal Survey of Youth. That kind of job mobility has the potential to greatly complicate the task of managing your retirement assets. For many, an IRA rollover makes sense to better track and manage your retirement assets.

2. Increased investment options. Rolling over to an IRA may offer more investment options than your employer and plan custodian. More options may help you better diversify your investments or better align your accounts with your risk tolerance. Remember, while diversification can help reduce market risk, it does not eliminate it.

3. Potential tax-deferred compounding. IRA rollovers may offer continued tax-deferred treatment of retirement assets. There are two ways to accomplish an IRA rollover. Request a “direct” IRA rollover from your former employer or an “indirect” rollover.

With a “direct” rollover, the funds being rolled over must be paid directly to the receiving organization, not to you. If the assets are paid directly to the new IRA trustee/custodian, this does not create a taxable event, although it will be reported for tax purposes as a distribution and rollover.

With an “indirect” rollover the funds are made payable to the account owner, and the employer must withhold 20 percent of the withdrawal, which is sent to the Internal Revenue Service for taxes. You would still have 60 days to deposit the rollover into the IRA, as well as an amount equal to the 20 percent if it’s available from another source in order to maintain continued tax-deferral. In addition, if you are younger than age 59 1/2 when the distribution occurred, a 10 percent penalty may be assessed on any amounts not rolled over within 60 days of the withdrawal.

4. Simplified calculation of required minimum distributions (RMDs). Required minimum distributions (RMDs) – the minimum amounts that a retirement account owner must withdraw annually starting with the year that he or she reaches age 70 1/2 or, if later, the year in which he or she retires – must be calculated for a combination of all your tax-qualified retirement accounts. Consolidating retirement accounts into one rollover IRA simplifies the calculation of a required minimum distribution. (Required minimum distributions cannot be included in a rollover IRA.)

Additional factors to consider before rolling your retirement assets over to an IRA include the fees and expenses charged by your employer plan versus those charged by the IRA, as well as the impacts of combining pretax and after-tax assets, the 5-year waiting period for Roth assets, net unrealized appreciation, and early retirement. Consult a tax advisor before making the decision to do a rollover.

Additional regulations apply to IRA rollovers, but knowing a few of the basic principles can be helpful. Rolling over to an IRA may be what is needed to help you more effectively monitor and manage your retirement assets – and dreams.

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