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New Job, Better Plan - IRA Rollover?


An IRA (Individual retirement account) rollover is a transfer of funds from an employer-sponsored retirement plans into a traditional IRA or a Roth IRA. IRA rollovers may occur when people change jobs and wish to move 401(k) or 403(b) assets into an IRA or either simply want to switch to an IRA with better benefits or investment choices.

To maintain the tax-deferred status of retirement savings, it is significant that the rollover must be completed within 60 days of the distribution from an employer’s plan.

If the amount is directly transferred from one account to another (i.e. institution to institution transfer), you will be able to avoid the potential penalties and withholding of the 20% federal income tax from your former employer.  However, if you opt for an indirect rollover wherein the employer gives the check for the value of your account after withholding the 20% federal income taxes, the onus is on you to complete the full rollover within the time limit of 60 days.

When there is a direct rollover of traditional 401 (k) to an existing or new traditional IRA, no taxes are due on the assets you move, and any new earnings accumulate tax deferred. Since the contribution made to the traditional 401 (k) was pre-tax, no tax is paid while rolling over to traditional IRA. You have to pay taxes on the contribution and earning later when you withdraw the money and you may also be subject to a 10% federal income tax penalty if the distribution is taken prior to reaching age 59 ½.

Further, in case of traditional IRA, starting at the age of 70 ½ you are required to take a minimum distribution (irrespective of the fact you are still working or not). 


When there is a direct rollover of traditional 401 (k) to the existing or new Roth IRA, you will have to pay taxes on the rollover amount you convert since contributions to a Roth IRA are made with post-tax income. If you withdraw only the amount of your Roth contributions, the distribution is not considered taxable income and is not subject to penalty, regardless of your age or how long it has been in the account. To qualify for a tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet the five-year holding requirement and the distribution must take place after age 59½ or due to death, disability, or a first-time home purchase ($10,000 lifetime maximum).

You are not required to take mandatory minimum distribution at the age of 70 ½ as an owner; however Roth IRA beneficiaries must take mandatory distributions.

In case you plan to rollover your retirement assets in an IRA to other IRA (IRA to IRA rollover), in order to minimize taxes you may consider to rollover Roth to Roth IRA and Traditional to Traditional IRA. No taxes are due if you roll over assets from a traditional plan to a traditional IRA, or if you roll over your contributions and earnings from a Roth plan to a Roth IRA. But if you decide to move from a traditional plan to a Roth IRA, you will have to pay taxes on the rollover amount you convert.

The decision to move your retirement funds or stay put is an important one. In most of the cases, you are not required to act immediately upon switching jobs or retiring. It may be a good idea to consult with your plan administrator, financial planner or tax professionals on the tax implications of each option. Take the time to assess your transfer options.

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