IRA Financial’s Adam Bergman discusses the IRA and 401(k) rollover rules, when and how you can perform them, and retirement account transfers.
In the Podcast
Rollovers and transfers are the two ways to move funds from one retirement account to another. The simplest move is from one like account to another (401(k) to 401(k), IRA to IRA, etc.). This is a transfer. Funds get moved from one plan at one custodian to the same plan at a different one. For example, you can transfer IRA funds from TD Ameritrade to IRA Financial, or from Schwab to Wells Fargo. This is not a rollover, as some people mistakenly believe. Unlike rollovers, you can do as many transfers as you want. You don’t ever receive the funds and the transfers are always tax free.
On the other hand, rollovers work a bit differently, though it’s the same concept. Basically, it’s moving funds from one type of retirement plan to another. This can be 401(k) to IRA or vice versa and are generally tax free as well.
There are two types of rollovers – direct and indirect. A direct rollover is simply a transfer between different types of retirement accounts. They can be done as often as you would like. Again, you don’t ever take receipt of the funds. They simply go from one plan administrator to another. As Mr. Bergman notes in the podcast, you do not need a triggering event to move funds from an IRA to an IRA. However, most 401(k) plans require one when you wish to move 401(k) funds out of the plan.
The tricky part is the indirect rollover and they can only be done once every twelve months. With an indirect rollover, funds are distributed form your old 401(k) or IRA and you receive that money. You then have 60 days to contribute those funds into another retirement plan. If you are moving funds out of a 401(k) plan, there is a 20% withholding tax as well. If you indirectly roll over $10,000, you would receive a check for $8,000. You then have 60 days to use that money, before contributing to the new plan.
The 60 day rules is very important to remember. Failure to deposit those funds into a new retirement plan within that time-frame will essentially nullify the rollover. Once the 60 days is up, funds that have not been returned to a retirement plan will be considered distributed, or withdrawn. Any taxes and penalties will become due.
The only time you should consider an indirect rollover is if you need short-term use of your retirement funds. If you have a 401(k), you may take a loan, but only if the plan allows for them. Further, you should only do it if you can re-contribute those funds within that 60 days. The whole point of saving in a retirement plan is the tax advantage you receive from them.
In most cases, a transfer or direct rollover is the best way to move funds from one retirement account to another. The short-term 60 day loan may help you out if you are in dire straights, but only use as a last resort.
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Join us next episode as Mr. Bergman discusses tax deferral and capital gains and how they affect your retirement account and tax planning.
