IRA Rollover

What is an IRA Rollover?

A rollover allows you to take a lump-sum dis­tri­b­u­tion from your for­mer employer’s qual­i­fied retire­ment plan, such as a 401(k) or 403(b), and trans­fer it direct­ly to anoth­er tax-deferred retire­ment plan account. One such retire­ment plan account is an IRA rollover.

Rolling over plan assets to an IRA rather than keep­ing assets in a pre­vi­ous employer’s plan or rolling over to a new employer’s plan should reflect con­sid­er­a­tion of var­i­ous fac­tors, the impor­tance of which will depend on your indi­vid­ual needs and cir­cum­stances.

Options for your assets

You have a vari­ety of alter­na­tives avail­able to you with regard to the assets in your employer’s plan. What you choose will depend on your pre­vi­ous employer’s plan doc­u­ment, your spe­cif­ic needs, and the advice of your tax advi­sor. The fol­low­ing chart describes dis­tri­b­u­tion options avail­able under cur­rent reg­u­la­tions.

Options Out­comes
Leave dis­tri­b­u­tion
in your for­mer employer’s plan.
If your bal­ance meets cur­rent gov­ern­men­tal lim­its and plan pro­vi­sions, you may leave the assets in the cur­rent plan. Employ­er retains respon­si­bil­i­ty for select­ing invest­ments avail­able to you. Dis­tri­b­u­tion options are con­trolled by the Plan Doc­u­ment.
Keep/spend your dis­tri­b­u­tion from the qual­i­fied employ­er plan. 20% of the tax­able por­tion of the amount will be with­held imme­di­ate­ly and paid to the IRS at the time of with­draw­al. You will be sub­ject to fed­er­al (and state) income tax­es on the tax­able por­tion of the amount dis­trib­uted, plus a 10% penal­ty for ear­ly with­draw­al may apply if you are under age 55 when you retire or ter­mi­nate ser­vice.* The amount of the dis­tri­b­u­tion may increase your Mod­i­fied Adjust­ed Gross Income (MAGI) to a thresh­old that impos­es an addi­tion­al 3.8% Medicare tax on cer­tain invest­ment income. Cer­tain oth­er penal­ty excep­tions may apply.
Receive your dis­tri­b­u­tion and deposit it into an IRA rollover. Lump-sum dis­tri­b­u­tions may be deposit­ed into an IRA rollover account with­in 60 days of dis­tri­b­u­tion. Expect an imme­di­ate 20% tax with­hold­ing paid to the IRS on the tax­able por­tion of the amount. The 20% short­fall must be made up from your own pock­et to ful­fill the entire rollover amount. Oth­er­wise, the 20% amount with­held will be sub­ject to income tax­es and pos­si­ble penal­ty tax­es.*
Trans­fer your dis­tri­b­u­tion direct­ly into your new employer’s plan or an IRA rollover. Instead of receiv­ing a lump-sum dis­tri­b­u­tion from your retire­ment plan, your pre­vi­ous employ­er can trans­fer your dis­tri­b­u­tion direct­ly to a rollover IRA or to your new employer’s retire­ment plan, if the plan doc­u­ment includes this option. This allows you to avoid the 20% tax with­hold­ing and ear­ly with­draw­al penal­ties, and you will defer income tax­es on the dis­tri­b­u­tion until you make with­drawals from the IRA or new employer’s plan.

* If you are between the ages of 55 and 59½ talk to your tax advi­sor about ear­ly with­draw­al penal­ties, and poten­tial excep­tions.

IRA Rollover Benefits

An IRA rollover offers:

  • No Cur­rent Income Tax­es — You avoid cur­rent income tax­es, includ­ing a manda­to­ry 20% income tax with­hold­ing and pos­si­bly a 10% excise tax penal­ty, when you trans­fer.
  • Diver­si­fied Invest­ment Options — Receive invest­ment diver­si­fi­ca­tion and flex­i­bil­i­ty through a wide vari­ety of mutu­al funds.
  • Tax-Deferred Retire­ment Sav­ings — Invest for your retire­ment years while pay­ing no income tax­es today. Invest­ment earn­ings are tax deferred until with­drawn.
  • With­draw­al Flex­i­bil­i­ty — If you’re between the ages of 59 ½ and 70 ½, you can with­draw what you need from your IRA rollover at any time with­out tax penal­ties. You will be respon­si­ble for tax­es at your cur­rent tax rate on any with­drawals. After the age of 70 ½, cur­rent tax laws require you to make min­i­mum with­drawals based on aver­age life expectan­cy. Penal­ty excep­tions are avail­able and may be applic­a­ble to your sit­u­a­tion.
  • Excep­tions to With­draw­al Penal­ties — One of the IRS-approved penal­ty excep­tions is the Sub­stan­tial­ly Equal Peri­od­ic Pay­ment Plan which allows you to take dis­tri­b­u­tions based on your life expectan­cy and receive an income stream from your IRA rollover at any age, with­out incur­ring an ear­ly with­draw­al penal­ty. Again, income tax at your cur­rent tax rate will be assessed.

IRA Rollover Features, Options and Reports

  • Invest­ment Selec­tion
    We offers you many invest­ment options for your IRA rollover. Each has a spe­cif­ic invest­ment objec­tive that is designed to match your retire­ment plan­ning needs. Options include domes­tic and inter­na­tion­al equi­ty funds, growth and income funds, fixed income funds, and mon­ey mar­kets funds — to name just a few. You also have the free­dom to change invest­ments with­in your IRA as you choose, with­out any tax con­se­quence.
  • Diver­si­fi­ca­tion
    An IRA rollover allows you to diver­si­fy your invest­ment by select­ing two or more mutu­al funds for your port­fo­lio. Such diver­si­fi­ca­tion also effec­tive­ly reduces the risk of hav­ing all your mon­ey in a sin­gle secu­ri­ty.
  • Record­keep­ing
    You will receive a Trans­ac­tion Con­fir­ma­tion each time you com­plete a pur­chase, redemp­tion, trans­fer or exchange. You will receive a year-to-date state­ment for each cal­en­dar quar­ter and a year-end state­ment after the end of each cal­en­dar year.
    You can elect to have all of your share­hold­er account state­ments deliv­ered to you in one enve­lope. You can also elect to view your state­ments elec­tron­i­cal­ly and decline to receive paper state­ments in the mail.
  • Tax Report­ing
    Each year, you will receive reports con­tain­ing infor­ma­tion about your IRA that you will need in order to file your income tax return.
  • IRA Rollover Trans­fers
    If you have estab­lished an IRA rollover, else­where, you can trans­fer your IRA to us with no tax penal­ty. We will be hap­py to explain how to prop­er­ly trans­fer your IRA.

Diver­si­fi­ca­tion does not guar­an­tee a prof­it nor pro­tect against loss.

Cash Distribution versus Rollover

While it may be tempt­ing to cash out your assets in a for­mer employer’s retire­ment plan instead of rolling them into an IRA or keep­ing them in your employer’s plan, the penal­ty is sig­nif­i­cant.

  Cash Dis­tri­b­u­tion Rollover
Total in Your 401(k) Fund $25,0001 $25,000
Distribution/Rollover $25,000 $25,000
Auto­mat­ic 20% With­hold­ing -$5,000 $0
Addi­tion­al Fed­er­al Tax­es $1,2502 $03
10% Penal­ty $2,500 $0
Total Fed­er­al Tax and Penal­ties $8,7504 $0
You Receive $16,250 $25,000
  1. Does not include after-tax con­tri­bu­tions
  2. Assumes mar­gin­al fed­er­al tax rate of 25 per­cent: 25 per­cent x $25,000 less $5,000 already with­held
  3. Tax­es deferred until dis­tri­b­u­tion
  4. In addi­tion to fed­er­al tax­es, you may owe state tax­es depend­ing on the law in your state.