Questions you might have about IRA rollovers

Chances are your 401(k) is your biggest savings tool for retirement. So it’s worth your time to understand how to roll over your 401(k) to an IRA without any tax implications. We’ll make it easy. Starting with clear and straightforward answers to some of the most frequently asked IRA questions. Don’t see yours listed here? Just email us.

How do Rollover IRAs help me avoid paying taxes on my distribution?

Rolling over your eligible 401(k) distribution directly to a Rollover IRA allows you to avoid a possible 10% early withdrawal penalty, mandatory 20% withholding for federal income taxes, and to postpone paying taxes on the amount rolled over until it is withdrawn from your IRA. It also lets your eligible rollover assets continue to accumulate any earnings on a tax-deferred basis.

If you want to avoid the 20% mandatory withholding for federal income taxes at the time of distribution from your employer's plan, make sure that you directly roll over your eligible distribution into a Rollover IRA or other eligible retirement plan. You may want to hold Rollover IRA funds separately from your Traditional IRA assets to facilitate the possibility of investing your Rollover IRA assets in another employer-sponsored plan in the future.

Can I just reinvest the check the company sends me?

Yes, you can. But remember, if your company plan makes the check payable to you, 20% of your eligible retirement plan distribution will be withheld for federal income taxes. The only way to avoid this withholding is to have your current employer make your distribution check payable to the financial institution you've chosen as custodian for your new rollover plan. Either you or your current employer should then send this check directly to the financial institution.

I already received a check made payable to me—and 20% was withheld. If I reinvest my money now, can I get that 20% back?

Yes, but first you'll have to replace the 20% that was withheld with your own savings. Then you'll have to reinvest this 20% along with the 80% you already received — all within 60 days of receiving the distribution. If you do, you can receive credit for the 20% that was withheld toward your income tax liability when you file your tax return. However, if you don't have the cash to make up for the 20% withheld, the IRS will consider that 20% as a distribution, making it subject to taxes and a possible 10% early withdrawal penalty.

What should I do with my after-tax contributions?

While you can't currently roll over these contributions directly into a Rollover IRA, you can still invest them in a non-retirement account. For example, you can invest any after-tax contributions into a variety of mutual funds. To keep the deferred growth potential, you may want to consider a fixed or variable annuity. After-tax contributions will be eligible to be rolled into a Traditional Rollover IRA.

Can I add more money to my Rollover IRA later?

Yes. You can add additional money to your Rollover IRA. Currently, in order to avoid commingling, this money must also be an eligible distribution from another qualified retirement plan or another Rollover IRA. For example, a lump sum distribution from a corporate pension plan can be added to a Rollover IRA that was set up with assets rolled over from a 401(k) plan. We recommend that you maintain assets from unlike sources in separate accounts for tracking purposes. For example, assets rolled over from a 401(k) plan should be held in a separate account than assets in a 403(b) plan. This will simplify the process if you decide to move these assets into another employer-sponsored plan in the future.

Can I leave my investments in my current plan indefinitely?

Generally, if your vested retirement account balance is $5,000 or more, you may leave your money in your former employer’s plan until you reach your retirement age.The federal government will allow you to defer paying taxes on this money only for so long. Generally, you must begin to take withdrawals no later than April 1st of the year following the year in which you turn age 70 ½. Of course, your company's plan may have different restrictions. Check with your benefits office.
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