Rollover IRA Explained

Once you leave a job for whatever reason, if you have a retirement plan at your company, you need to make a decision as to what to do with this retirement plan. You can either choose to rollover the plan into an IRA or take the lump sum and pay the tax and penalties. Some companies also allow you to leave the retirement plan intact until you reach retirement age.

A rollover means you move the money from a company sponsored retirement plan such as a 401(k) into an IRA. If you receive a payout from your company-sponsored retirement plan, a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status of your retirement savings and will avoid penalties and taxes.

Eligible distributions rolled over from a company sponsored retirement plan can be combined with an existing IRA or put into a separate IRA.

If you create a separate IRA for your rollover, you can easily move these funds to another employer sponsored plan in the future. It's a good idea to keep your rollover IRA separate from any other IRA's you might have because once you make contributions to a rollover that are not from a company sponsored plan, you lose the right to move this rollover to a company sponsored plan.

Distributions from a Rollover IRA
The distribution rules for a rollover IRA are the same as the rules for a traditional IRA. Contributions and earnings are taxed when withdrawn after age 59 ½. Withdrawals before the age 59 ½ are taxable and subject to a 10% penalty with certain exceptions.

Withdrawals must begin by the year after you reach 70 ½ to avoid penalties.

If you choose a direct rollover, your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the 20% IRS withholding tax.

If you choose a payout by check from your employer, you can avoid the 20% IRS withholding tax if you deposit the check plus 20% into a rollover IRA within 60 days.