An IRA rollover is a process of transferring funds from one retirement account to another, such as from an employer-sponsored plan to an individual retirement account (IRA) . The purpose of a rollover is to maintain the tax-deferred status of the assets. Here are some key points to know about IRA rollovers:
- A rollover IRA is an account that allows you to move funds from an old employer-sponsored plan, like a 401(k), to an IRA.
- Rollovers can occur from a retirement account, such as a 401(k), into an IRA, or as an IRA-to-IRA transfer.
- Most rollovers take place when people change jobs and wish to move 401(k) or 403(b) assets into an IRA, but IRA rollovers also happen when retirement savers want to switch to an IRA with better benefits or investment choices.
- There are two ways to roll over retirement assets into an IRA: directly and indirectly. A direct rollover is the simplest way to consolidate your retirement balances. Your retirement plan administrator sends your funds directly to the receiving IRA custodian. In some cases, the plan administrator may mail a check to you, which you then forward to the IRA custodian. While you physically handle the check, it doesnt count as a distribution and doesnt result in an early withdrawal penalty.
- Indirect rollovers could have tax implications. In an indirect rollover, the assets from your existing account or plan are liquidated and the custodian or plan sponsor mails a check made out to you or deposits the funds directly into your personal bank or brokerage account. This route leaves it up to you to redeposit the funds into the new IRA.
- Rollover distributions are reported to the IRS and may be subject to federal income tax withholding.
- There are contribution and income limits to rollover IRAs.
- When done correctly, the money keeps its tax-deferred status and doesnt trigger taxes or early withdrawal penalties.
- Rollover IRAs can provide a wider range of investment options and low fees, particularly compared with a 401(k), which can have a short list of investment options and higher administrative fees.
- When you know what type of account you want and where you want to open it, you can start the rollover process. Virtually all rollover IRA providers help you do this, but the basics are simple: Contact your former employer’s p...
