Today’s
highly mobile workforce has people changing jobs to climb up the
career ladder rather than staying in one place for their entire
career. Those who are
changing jobs must deal with multiple retirement plans, but there
are options available concerning your retirement account.
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If you
receive a distribution from your pension or company retirement plan,
you must make a decision about what to do with that lump sum within
60 days of the date you receive your money to ensure that you
don’t incur heavy taxes and penalties.
You’ll also want to take immediate steps to invest those
funds for continued growth.
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You
cannot directly roll your retirement account into a Roth IRA.
You can roll your account into a traditional IRA and then
convert it to a Roth IRA.
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One of
the simplest, most flexible ways options is to roll the distribution
directly into an IRA.
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Direct Rollover into an IRA:
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 Your employer would directly transfer your funds into an IRA or
send you a check
that is payable to the financial institution
housing your IRA.
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There is no required withholding.
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Indirect Rollover into an IRA:
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Your employer sends you a check, but they is legally required to
withhold 20% for
income tax purposes.
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You have 60 days to put the funds in a different qualified
retirement account in order
to avoid penalties for taking a
non-qualified distribution. |
If you fail to reinvest the distribution before the 60-day
deadline, you are required to
pay a penalty, plus ordinary income tax
on the distribution.
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You are responsible for contributing the entire amount of your
previous account,
which means you must make up the 20% difference out of your own pocket.
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You will be able to recover the money later when you file your
income taxes.
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If
you have difficulty replacing the 20% withholding, an indirect
rollover could be
problematic.
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An IRA Rollover provides an ideal way to continue to benefit from a
tax-deferred retirement savings.
If you decide to rollover your distribution into an IRA
within 60 days, you avoid paying taxes.
Your account continues to grow tax-deferred and can even be
moved into another employer plan later.
Mutual fund companies can set up an IRA Rollover
for you.
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