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IRA Rollovers

An IRA Rollover, often referred to as a 401k Rollover, is the process of establishing an IRA account to custody assets that have been distributed from a former employer's retirement plan, such as a 401(k) or Profit Sharing Plan. The assets within this account will continue to compound on a tax-deferred basis until the investor removes some or all of the assets, typically after age 59 ½, where such distributions are subject to ordinary income taxes.

For those persons who are changing jobs or retiring, an IRA rollover generally is regarded as a prudent strategy versus keeping one's assets in the employer's 401k. Rollover IRA benefits include:

  • Continued tax-deferred growth
  • More investment options and flexibility
  • The ability to take distributions as desired, subject to IRS regulations
  • Consolidation of retirement assets – reduced paperwork, easier investment management
  • 60-day interest-free loan (permissible once per year)
Essentially, there are two types of IRA Rollovers – a Direct Rollover and Indirect Rollover:
  • Direct Rollover
    A Direct Rollover, or Trustee-to-trustee transfer, instructs one's previous employer to make the retirement plan distribution payable to the new IRA custodian or retirement plan. Since the money is transferred directly between these two 'trustees', it is not subject to any income taxes in this process; thus 100% of one's money is rolled over into the new account.

  • Indirect Rollover
    An Indirect Rollover instructs the previous employer to make the distribution payable directly to the former employee, less 20% that is withheld for taxes. This distribution must be rolled over to a new IRA or retirement plan within 60 days. Should the employee intend to make a full rollover from the previous employer's plan, an additional 20% amount that was withheld from the distribution must be included in the rollover deposit. Otherwise, taxes (and potential penalties) will be imposed on the 20% withholding that was not rolled over to the new plan.
As one might imagine, IRA Rollovers can be a complex process - based upon the countless IRS regulations that govern their existence. But Advisors have tremendous incentive to make this a focus in their practice. With scores of Baby Boomers reaching retirement, an unprecedented opportunity exists for Advisors to grow their practice while helping these retirees prepare for retirement.

Let VendorPedia help you with additional IRA Rollover resources!

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