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What is an IRA Rollover? 2 Options for Retirement Savers

  |  By Dimetra Pelekidis, CISP®, SDIP

IRAs are one of the fastest growing components of the US retirement market, representing nearly one-third of the $27.1 trillion market. What’s driving this growth? According to research firm Cerulli Associates, it’s being driven by IRA rollovers.

So, what is an IRA rollover and how you use it to help build your retirement savings? Here’s a look at these popular retirement savings accounts.

What is an IRA Rollover?

An IRA rollover occurs when you transfer the full amount of assets from one eligible retirement plan, like an employer-sponsored 401(k) or 403(b), into an IRA. You can roll your assets into a traditional IRA or a Roth IRA.

IRA rollovers allow retirement savers the benefit of transferring assets from one qualified retirement plan to another without facing penalties while also preserving their account’s tax-advantaged status.

What is a Direct IRA Rollover?

The term IRA rollover is often associated with individuals rolling over funds from a 401(k) into an IRA after they change jobs or retire. Once you leave a job or retire, you can no longer contribute to your previous employer’s 401(k), and if your balance is too low, your employer can cash out your account, potentially making you subject to unwanted taxes and penalties.

To continue saving in a tax-advantaged manner, many investors choose to directly rollover their employer-sponsored retirement account into an IRA. This is referred to as a direct rollover, and it describes moving funds from one qualified retirement account—like an IRA, 401(k), 403(b), or 457 plan—directly into an IRA.

When you initiate a direct IRA rollover, your retirement plan administrator either makes a payment directly into your new IRA or the administrator will send you a check made payable to your new IRA. This allows the funds to be directly rolled over into a new account without you having to take personal possession of the assets.

As FINRA explains, if you roll over your assets from a traditional plan into a traditional IRA, or if you roll over your contributions and earnings from a Roth retirement plan into a Roth IRA, you will not need to pay taxes. But if move assets from a traditional retirement plan into a Roth IRA, you will have to pay taxes on the rollover amount you convert. A tax advisor can help you better understand any potential tax implications of a direct rollover.

What is an Indirect IRA Rollover?

Indirect rollovers are also referred to as 60-day rollovers because they can be used to turn your retirement savings into a short-term loan. In the case of an indirect rollover, you take funds out your IRA, and a check is issued directly to you—not your IRA custodian. That means you take responsibility for completing the rollover.

You then have 60 days to roll your distributed retirement funds into an IRA before the money becomes taxable or subject a 10% early withdrawal penalty. This effectively gives you 60 days of access to interest-free funds.

In the past, the IRS used to permit 60-day rollovers once every 12 months from each IRA that you owned. But since 2015, the 12-month rule has applied to all IRAs that you own. For instance, if you have two IRAs, and you take a distribution from one and roll it over, you are not allowed to take another distribution from either IRA and roll the funds into another IRA within the same 12-month period as the first rollover.

While some investors use indirect IRA rollovers as a 60-day loan, other investors choose this method because their former employer does not provide the option to directly rollover a 401(k) into an IRA.

But be aware: If a retirement plan distribution is paid directly to you (not the new IRA), the IRS states that it is subject to mandatory withholdings of 20% even if you intend to roll it over later. Additionally, if you are under the age of 59½ when the distribution occurs, you may face a 10% penalty on the withdrawal.

Stay in the driver’s seat with your retirement savings

At PENSCO, we want you to be in the driver’s seat when it comes to your retirement savings and understanding the options for managing your nest egg. If you are considering an IRA rollover, it’s always recommended that you work with a trusted tax advisor who can help to ensure that you do not inadvertently incur a taxable event. You can also check out this blog from FINRA, which covers 10 items to consider before making an IRA rollover.

If you have questions about your PENSCO IRA and rollovers, please give us a call at 866-818-4472.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.