Whether
you are moving on to another company or you have reached the glorious day of retirement,
you will be faced with the option of rolling over your retirement plan(s). It
may seem like it is light years away, when in essence, it may be right around
the corner.
There are
several ways to roll over a retirement plan. If you are moving to a different
company, you must decide if you want to place your money into your new company's
retirement plan, or roll the money to an IRA. On most occasions, you should roll
your money directly into an IRA account. This gives you the ability to choose
any investment vehicle you desire. There are some occasions where you may choose
to roll over to your new company's retirement account. If you believe you may
need to borrow against the value of your retirement account, you should consider
a rollover to the new plan, not to an IRA. An IRA cannot be borrowed against,
while some retirement plans allow borrowing.
The
process of rolling over a retirement plan is simple: You need to convey to your
former employer that you would like to roll over your retirement plan held with
the company. The company should provide proper paperwork for the rollover to occur.
The paperwork will be processed through the former employer. When rolling over
your plan, make sure it is not a taxable event by requesting a direct rollover
whereby the plan assets transfer directly to your IRA, or by having the check
made payable to the brokerage house or the new company in the benefit of your
name. This way, you will never have personal possession of the money and the funds
will not be subject to an early withdrawal penalty. If you receive the money in
your retirement account as a distribution, it is considered an early withdrawal
and subject to a mandatory 20% withholding for federal income taxes.
If
for some reason the rollover becomes a taxable event, you could look into making
an indirect rollover. An indirect rollover takes place when the taxpayer receives
a distribution check from the employer, less the mandatory 20% withholding. The
taxpayer then deposits the funds received into an IRA within the allowable 60-day
rollover period. However, the indirect rollover can lead to difficulties and even
some unwanted tax consequences, as the following scenario illustrates:
For
example, John Doe has $500,000 in his retirement plan on the day he retires, March
15, 2007. John decides he needs a distribution from his retirement plan for a
new boat. The company pays out his distribution in the form of a check to him
for $400,000, after the 20% mandatory withholding, in this case $100,000. On April
30, 2007, John decides not to purchase the boat and that it would be better to
roll over his retirement account to an IRA, so it can grow tax-deferred until
withdrawal. He is allowed to do this because it is within 60 days of the initial
withdrawal. John takes the $400,000 received from his distribution and puts it
into his IRA account.
Now
John has two options to choose from regarding the additional $100,000 withheld.
He can come up with the additional $100,000 out of his personal funds, which will
be returned to him as a tax refund once he files his 2007 tax return, or John
can decide not to contribute the additional $100,000 and pay ordinary income taxes
on the $100,000 withheld because this is considered a partial distribution. The
$100,000 also may be subject to an additional 10% withholding if John is under
the age 59½.
Bottom
Line
As you can
see, there are several solutions to rolling over a retirement plan. As long as
money is not needed immediately, an individual should roll over funds to continue
tax-deferred growth until a withdrawal is needed or mandatory. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
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