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What Is an IRA Rollover?
If you leave a job or retire, you might want to transfer the
money you’ve invested in one or more employer-sponsored retirement plans to
an individual retirement account (IRA). An IRA rollover is an effective way
to keep your money accumulating tax deferred.
Using an IRA rollover, you transfer your retirement savings
to an account at a private institution of your choice, and you choose how
you will invest the funds. To preserve the tax-deferred status of retirement
savings, the funds must be deposited in the IRA within 60 days of withdrawal
from an employer’s plan. To avoid potential penalties and a 20% federal
income tax withholding from your former employer, you should arrange for a
direct, institution-to-institution transfer.
Currently, you can only roll over funds from an
employer-sponsored plan to a traditional IRA, but starting in 2008, direct
rollovers to a Roth IRA will be allowed (of course, income limits apply to
Roth IRA rollovers until 2010, when they are repealed, and ordinary income
taxes are owed on all amounts rolled over to a Roth IRA).
An IRA can be tailored to your particular needs and goals and
can incorporate a variety of investment vehicles, as opposed to the limited
number of options available in many employer-sponsored retirement plans. In
addition, tax-deferred retirement savings from multiple employers can later
be consolidated.
Over time, IRA rollovers may make it easier to manage your
retirement savings by consolidating your holdings in one place. This can
help cut down on paperwork and give you greater control over the management
of your retirement assets.
Distributions from traditional IRAs are taxed as ordinary
income and may be subject to an additional 10% federal income tax penalty if
taken prior to reaching age 59½. Just as with employer-sponsored retirement
plans, you must begin taking required minimum distributions from a
traditional IRA each year after you turn age 70½.
Qualified distributions from a Roth IRA are free of federal
income tax but may be subject to state, local, and alternative minimum
taxes. To qualify for a tax-free and penalty-free withdrawal of earnings, a
Roth IRA must be in place for at least five tax years, and the distribution
must take place after age 59½ or due to death, disability, or a first-time
home purchase ($10,000 lifetime maximum). The mandatory distribution rules
that apply to traditional IRAs do not apply to Roth IRAs.
© 2007 Emerald Publications
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