IRA rollover is the term for moving your funds from a company plan (401k, pension, profit sharing) to your own IRA. It seems like it would be simple enough but IRS makes IRA rollovers needlessly complex. For example, if you have the check handed to you by your employer, you have 60 days to place this money into an IRA. If you're late, then the entire IRA becomes taxable. So a big tip is to never handle the IRA rollover check. Have your employer send it directly to the custodian of your IRA account e.g. your securities firm or bank.
Another HUGE reason you don't want your employer to hand you a check is that they must withhold 20% and deposit those taxes with IRS (just in case you never rollover the funds, IRS will have collected a big chunk of the tax money you will owe). Here's an example. You have $100,000 in your company plan for your IRA rollover. You ask for a check. You employer sends you $80,000 and sends $20,000 to IRS. You have 60 days to deposit $100,000 into an IRA rollover account to avoid all taxes. So you must take $20,000 from your own pocket so that you'll have the entire $100,000 to rollover. Yes, come tax time next year, IRA will return the $20,000 that your employer withheld.
However, this handling of your own $20,000 is needless by just having your employer send the funds directly to your new IRA rollover custodian.
You don't need to complete your rollover by depositing the funds from your employer's plan into an IRA. You could have the funds go to your own pension or profit sharing account (if you are self employed), or rolled over to your new employer's 401k plan (check with your new employer as taking IRA rollovers into their plan is an option they may not permit).
You can't rollover just any distribution for your employer plan. Here are types
of payments that you cannot use for a tax free rollover to an IRA:
- Any distribution which is part of a series of substantially equal periodic payments;
- Any required minimum distributions
- Any distribution which is made upon hardship of the employee
- Certain returns of elective 401(k) contributions, corrective distributions, loans treated as distributions, and similar items.
You don't need to keep your IRA rollover separate form your contributory IRA however, there is a small reason to do so. Your contributory IRA funds have bankruptcy protection to $1 million but rollover IRA funds have such protection that is unlimited. Therefore, if the rollover balance is significant, you may want to keep it segregated in its own account.
See more details about IRA Rollover Paperwork
SEP IRA Rollover
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