IRAs: Rollover IRAs

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(Photo by Chip Somodevilla/Getty Images)

(Photo by Chip Somodevilla/Getty Images)

420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
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BOSTON (CBS) – A rollover IRA is when you transfer money from a retirement account into an IRA. It is not getting your dog to do a trick.

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. But you do not want to contaminate the dollars in the Rollover IRA by making a regular IRA contribution to the account. Doing so prevents your ability to rollover the account into a new employer’s retirement 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.

You can at any time move your IRA account to a different plan provider if you are not happy with your current choices. I would strongly suggest setting up a brokerage IRA so you have some flexibility as to the types of investments available to you. I would suggest companies like Fidelity or Schwab that allow you a broad range of choices, stocks, their own mutual funds, as well as mutual funds from different companies.

Another type of rollover is only between IRAs. Individuals are permitted to take a distribution from their IRA and roll those assets from that IRA to another IRA within 60 days of the receipt of the money. You can even roll those funds back into the old IRA. In essence you can borrow from your IRA but, and it’s a big but, you must get the money back into an IRA format quickly or it’s considered a distribution and you will owe taxes on it and possibly a 10% penalty. The IRS is notified if you do this type of a rollover but with a direct rollover, the IRS is not involved.  This type of rollover is only allowed once every 12 months.

The tax laws changed 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.

One more thing:  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 it’s 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.

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