Tuesday, March 08, 2005

IRAs: Part 3

Rollover: That Word You See Everywhere

If you are retiring or changing careers it's time to decide what to do with the funds in your 401(k) or other type of employer-sponsored qualified retirement plan. Your decision on how to receive your qualified plan distribution does have real life consequences that can mean the difference between living a comfortable retirement or wondering if your savings will last. Naturally, you want to protect what you've accumulated during your years of hard work.

Unfortunately, your distribution could be subject to a variety of taxes and penalties. What you need is a plan that meets your retirement needs, minimizes the impact of taxes, and avoids nasty penalties. One way to avoid the 20% mandatory withholding tax, as well as current income taxes, is to directly roll your entire distribution into an IRA. Since all earnings continue to accumulate on a tax-deferred basis, your money will compound and accumulate more rapidly than money placed in an otherwise identical taxable account. A self-directed IRA gives you the power and flexibility to shift your investments as your goals and economic conditions change. Investments in an IRA can include stocks, bonds, money- market funds, government securities, annuities and mutual funds.

If for some reason you have already received your lump-sum distribution, minus the 20% withholding tax, all may not be lost. You have 60 days from the date you received your payout to invest these funds into an IRA or qualified plan, along with an additional 20% of your own money to cover the amount withheld. When you file your income tax return, you will receive credit for the 20% withheld. Remember, you only have 60 days to do this. If you fail to act, your entire payout will be subject to state and federal income taxes.

To establish a direct rollover IRA, ask your former employer's plan administrator in writing to transfer the funds to the trustee of the new qualified plan or IRA. The plan administrator must provide you with the opportunity to make a direct rollover. If there's a waiting period for participating in your new employer's plan and you do not want to leave funds with your former employer, ask your former employer to transfer your retirement account to a conduit IRA, designed specifically for temporary rollovers.

source: NYL

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