The Basics on Rollover IRA

Preparing for your retirement should be done as early as possible. I’ve heard of stories from patents who were forced to retire early and end up not having pension. You company should have a retirement plan, and there are several options to choose from before setting up an Individual Retirement Account. You can either choose to take the lump sum and pay the taxes and penalties, or have it "roll over."

How Rollover IRA works?

The Rollover IRA lets you move the money from a company-sponsored plan like a 401K into an IRA. Once you have received the payout from you retirement plan, a Rollover could work to your advantage. This is because you still receive the tax-deferred status of your retirement saving and at the same time avoid penalties and taxes. What’s more, if you choose a Direct Rollover IRA, your employer can directly rollover your retirement plan payout into a Rollover IRA and you could still avoid the IRS withholding tax.

If you are under 59 ½ years of age and chose to have the check sent to you, your employer could consider this as an early withdrawal and withhold the income tax and send this to the IRS. Once the check is sent to you, you have 60 days to deposit it into a Rollover IRA. If your employer withholds the income tax, you need to add that amount to your deposit and take the appropriate steps with the IRS.

Eligible distributors whose IRAs were rolled over from a company-sponsored retirement plan can be combined with an existing IRA or put into a separate account. If you create a separate IRA for your rollover, you can easily move these funds and allow another employer-sponsored plan in the future. It is a good idea to keep your rollover IRA separate from any other accounts that you might have because you make contributions to a rollover that are not from a company-sponsored plan, and lose the right to move this rollover to a company-sponsored plan.

When you should withdraw your rollover IRA?

Just like in traditional IRAs, contributions and earning from your Rollover IRA are taxed if it is withdrawn after age 59 ½, while withdrawals before that are taxable and subject to a 10% penalty with certain exceptions. To avoid penalties, your withdrawals should begin by the year after you reach age 70 ½.

 

Posted by Ardent Editor on Jun 4 2008 in IRAs

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