Learn the rules to avoid a tax mistake when you roll over your Individual Retirement Account

Individual Retirement Account (IRA) rollover is a tax-free distribution from one retirement account to an IRA. It allows your savings to continue accumulating, tax-deferred. An IRA rollover comes in handy if you’d like to consolidate your retirement plans into one account or if you retire or leave a job. Even if you leave a company, some companies will allow you to keep your money in their plan’s account until your retirement age is reached. However, you may prefer rolling over your retirement savings to a better plan that is more advantageous to you.

Employee-sponsored retirement plans often have only a limited number of options for the investor. In contrast, an IRA you choose can be tailored to meet your individual needs and retirement goals. It can include a greater variety of investment vehicles. An IRA can also allow you to put all of your tax-deferred retirement savings from multiple plans into one account, enabling easier management of your retirement funds.

When you choose to do an IRA rollover, your retirement savings are transferred to an account with a private institution, and you decide how to invest the funds. A direct, institution-to-institution transfer is your wisest choice, to avoid penalties and the 20% federal income tax. Additionally, the retirement savings must be deposited in the IRA within 60 days of withdrawal from your employer’s plan for the fund’s tax-deferred status to remain in place.

In the past, account holders were only allowed to roll funds over from an employer-sponsored plan to a traditional IRA. Since 2008, however, direct rollovers to a Roth IRA, called a conversion, have been allowed. Income taxes are owed on all amounts rolled over to a Roth IRA, but beginning in 2010, there are no income limits, although limits do apply to Roth IRA contributions.

Just as with any employer-sponsored retirement plans, you must begin taking required minimum distributions from a traditional IRA each year after you turn age Traditional IRA distributions are taxed as ordinary income and if made before reaching age 59½, may be subject to an additional 10% federal income tax penalty.

The mandatory distribution rules that apply to traditional IRAs do not apply to Roth IRAs. Qualified distributions from a Roth IRA are free of federal income tax (under current tax laws) 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 or due to death, disability, or a first-time home purchase ($ 10,000-lifetime maximum).

This article is not intended to be tax or legal advice, and the information in it may not be relied on to avoid federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

• Name*
• Email*
• Phone*
• Zip Code*
• Name
  This field is for validation purposes and should be left unchanged.

Premium gift for you for registering for my newsletter

I am a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money.

Interested in additional information? Register for my FREE bi-monthly newsletter, "Layin' it on the line." It contains information that other people have found beneficial. I will never sell your information.

For registering, I have a Premium Gift for you.

Our 15th edition, “Safe Money Book” a $20 value

77,000 copies in circulation

Learn the basics of a Safe Money approach to investing.

And it is FREE with your "Layin' it on the line" newsletter