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How do IRA rollovers work?


A rollover is a transfer of assets from one retirement plan to another. It can be between two individual retirement accounts, a move that might be worthwhile if the investment choices or costs in one account are not to the holder’s liking. A rollover can also be made between two 401(k) or other employer plans by someone changing jobs or from an employer plan to an IRA. This last move might be made by someone who has just retired and finds that an IRA provides more flexibility than the former employer’s plan. If you roll over your 401(k) into an IRA after retiring or changing jobs, you also protect yourself from any possibility that you will lose your assets from your former employer going bankrupt.

Whatever the reason for executing a rollover, there are two ways to go about it: the easy way and the dangerous way. The first involves contacting the administrator of an employer plan – human resources will be able to provide details – or the institution where the account is held in the case of an IRA. Just fill out the relevant form and the rollover will be done without any further action on the accountholder’s part; the assets, either securities or their cash value or some combination of the two, will be transferred from one trustee to the other. This procedure is called a direct rollover.

Alternatively an accountholder can take possession of the assets in a retirement plan and transfer them into a new one. This is a risky maneuver because of the chance that the transfer fails to be completed – people forget, checks get lost in the mail, financial difficulties pop up out of nowhere and the money takes an unanticipated detour. If the rollover is not completed within 60 days, the Internal Revenue Service considers it a withdrawal. The amount received is taxable to the recipient as ordinary income by the IRS and state tax authorities, and for those under 59 and a half years old, there is an additional 10 percent penalty, although there are a few exceptions. So if you’re going to do a rollover, a direct one will be more convenient and potentially much less expensive.

-Conrad de Aenlle