Retirement plan rollovers can be defined as changing the ownership of retirement assets from an employer’s plan to an individual’s IRA account. This is a regular practice among employees who change jobs and begin working at new companies or become self-employed. You must move these assets into your IRA because they cannot remain with the former employer.
Employer Retirement Plans are mostly 401k plans which are tax-deferred accounts, similar to Traditional IRAs but are simply accounts for employers to allow their employees to save money on taxes by using pre-taxed dollars for contributions rather than post-taxed ones. A traditional 401k/403b/457(b) provides an employee with a way for extra income before taxes which was previously not available.
How are Rollovers done?
IRA Rollovers are done by moving the money from one IRA to another which is not owned by the same person but still allows you to gain all the benefits of your traditional IRA or SEP/SIMPLE IRA along with some huge tax perks that are not allowed for employer retirement plans. However, there are a few exceptions where IRAs can be moved between employers, such as an inherited IRA. For more information please see this article on inherited IRAs.
Why are Rollovers done?
This is usually done because most people don’t change jobs often so they want their retirement savings kept safe at their current provider until they find a secure job elsewhere and can open up an account with them, without accumulating large amounts of fees every year in the meantime. A 401k rollover normally has a waiting period of 60 days before you can withdraw your money without penalty, and most people don’t want to make two withdrawals in such a short time span.
Benefits of Rollovers.
An IRA Rollover is beneficial for many individuals because they can move their retirement plans from one account to another tax-free, meaning that there are no penalties involved when moving the funds over. The main exception is when the transfers would be between different types of accounts with different providers – such as a SEP IRA and Traditional IRA – then it’s considered a Permanent Distribution and must be treated as income on your taxes. It may also not qualify for a 10% early withdrawal penalty if you’re under 59 12. However, this is a rare occurrence and can be avoided by simply choosing another provider to handle your rollover with.
There is also the Roth IRA Rollover, which allows you to move your Traditional IRAs into a Roth IRA account within the same tax year without paying any taxes on it. This essentially allows you to pay for part of your retirement now (like a traditional IRA) but still gain all the benefits of a Roth IRA in years down the line once you retire and funds are drawn out after age 59 1/2 – where it can be taxed instead of being drawn out before then. The only problem with this is that if funds are drawn after 5 years or more have passed since it was converted, you have to treat it as taxable income. For more information take a look at this article on Roth IRA Rollovers.