Money Matters – IRAs: Rollover IRAs
BOSTON (CBS) – When we hear the word rollover, we think of a dog following a command to rollover, wanting a treat. Not so for an IRA. A rollover IRA is when you transfer money from another retirement account into an IRA.
Rollover IRAs are sometimes referred to as conduit IRAs, meaning they can be used to hold and transfer money between retirement accounts. The tax law changed in 2002 giving the taxpayer greater flexibility with regard to their retirement plans and IRAs making them portable and interchangeable if the individual plan allows the change.
Even though the law states that plans can accept money from other retirement plans your employer’s plan does not have to allow it. It is an expensive benefit to add because of the extra work involved and legal changes in the original retirement plan documents.
Rollover IRAs are set up to receive distributions from qualified retirement plans such as your 401(k), 403(b), 457, or another IRA. You “roll” the money from one account into another. If you are in between jobs, it can become a holding tank for your retirement money until you decide if you want to transfer the money into your new employer’s plan.
There is no time limit on money held in a rollover IRA. If your new employer does not allow transfers, no sweat! If you change jobs again and the newest employer allows transfers, you can roll it then.
For example you get laid off from Ace Widget Company and you have $24,000 in your 401(k) plan. You can rollover (transfer) the 401(k) account into a Rollover IRA. Now it takes you six months to find a job and you land one with a nonprofit company that has a 403(b) plan but does not allow rollovers into their retirement plan. So you leave the Rollover IRA intact.
Several years later another job change and you roll the money from your 403(b) into your rollover IRA. Now Ace Widget Company has been bought out and your old boss wants you to come work for the new company. They have a good 401(k) plan and you decide to use this opportunity to consolidate all of your retirement accounts so you transfer the amount in your rollover IRA to the new 401(k) plan.
As a general rule of thumb, when you leave a job you are usually better off rolling most employer plans into an IRA and leaving them there. You will have greater flexibility and certainly more choices. The one thing you will not have is the ability to borrow from the IRA as you do from some employer plans and if you rollover a 457 plan you lose the ability to start early distributions.