How And Why Should You Rollover Your IRA

August 24, 2010

When you retire or leave a job, you should seriously consider moving the money you’ve invested in one or more employer-sponsored retirement plans to an individual retirement account (IRA). An IRA rollover is an excellent way to keep your money accumulating tax deferred. Here is some advice about how to rollover your IRA.

When you rollover an IRA, you are transferring your retirement savings to an account at a private institution of your choice (typically a brokerage account), and you choose how you will invest the funds. To preserve the tax-deferred status of retirement savings, the funds must be deposited in the new IRA within 60 days of withdrawal from an employer’s plan. To avoid potential penalties and a 20% federal income tax withholding from your former employer, you should arrange for a direct, institution-to-institution transfer. Most brokerage firms are extremely accommodating to help you with this as they highly value these types of accounts.

Previously, you were only able to roll over funds from an employer-sponsored plan to a traditional IRA. However, since 2008, direct rollovers to a Roth IRA have been allowed. Starting this year, everyone is eligible for a Roth IRA rollover as there are no income limits (although income limits still apply to contributions to a Roth IRA). Keep in mind that ordinary income taxes are owed on all amounts rolled over to a Roth IRA.

An IRA can be tailored to your particular needs and goals and can incorporate a variety of investment vehicles, as opposed to the limited number of options available in many employer-sponsored retirement plans. In addition, tax-deferred retirement savings from multiple employers can later be consolidated.

Over time, IRA rollovers may make it easier to manage your retirement savings by consolidating your holdings in one place. This can help cut down on paperwork and give you greater control over the management of your retirement assets.

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