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What is a Rollover IRA

At certain point in your career, you may decide that you have enough of your job with the current company and decide to leave. Then you are facing the question of what to do with the retirement plan you have there. You have the following alternatives:

  • Rollover the plan into an IRA
  • Withdraw the accumulated money and face the subsequent penalties and income taxes
  • Leave the fund with the company until you retire (not all companies provide this opportunity)

Rollover IRA Defined

When you transfer your money from your company's retirement plan (401k plan for instance) to an IRA account, you are experiencing a rollover.

IRAs are advantageous in the case your company provides a payout as part of the sponsored retirement plan. By transferring the money into an IRA, you will still enjoy not paying taxes to the accumulated amount. You will also manage to evade the eventual penalties that are possible if you don't transfer the money into an IRA.

You are also provided with the option of transferring the eligible distributions from the company's retirement plan to an already existing IRA account. Otherwise you can open a separate account for this money.

The second option of opening a new IRA account is recommended in order to make your potential future transference of this money to your new employer's retirement plan. If you combine the money with an already existing IRA account, you will lose your right of transferring this rollover to a company sponsored plan, since it will represent a rollover from a non-sponsored company plan.

Distribution Requirements

Similar to the traditional IRA distribution requirements, you will be subject to income taxation and a 10% penalty if the money are retrieved before you reach the age of 59 ½. If you are at or above this age, you will be not subject to any taxes when retrieving the money from your rollover IRA.

A technique for evading whatsoever penalties is to start retrieving the money immediately you become 70 ½ years old.

In order to avoid the 20% IRS withholding tax, you should make sure that your employer has included the opportunity of direct rollover. This means that he will automatically transfer your retirement payout into a Rollover IRA.

You are subject to a 20% IRA withholding tax in the case of receiving the retirement payout by check. In order to evade this tax, within the next 60 days deposit the check and additional 20% into a rollover IRA.

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