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Rollovers. by John Jastremski

April 26, 2016

In general, a rollover is the movement of funds from one retirement savings vehicle to another. You may want, or need, to make a rollover for any number of reasons–your employment situation has changed, you want to switch investments, or you’ve received death benefits from your spouse’s retirement plan. There are two possible ways that retirement funds can be rolled over–the 60-day rollover and the trustee-to-trustee transfer.

The 60-day, or indirect, rollover

With this method, you actually receive a distribution from your retirement plan and then, to complete the rollover transaction, you make a deposit into the new retirement plan that you want to receive the funds. You can make a rollover at any age, but there are specific rules that must be followed. Most importantly, you must generally complete the rollover within 60 days of the date the funds are paid from the distributing plan.

If properly completed, rollovers aren’t subject to income tax. But if you fail to complete the rollover or miss the 60-day deadline, all or part of your distribution may be taxed, and subject to a 10% early distribution penalty (unless you’re age 59½ or another exception applies).

Further, if you receive a distribution from an employer retirement plan, your employer must withhold 20% of the payment for taxes. This means that if you want to roll over your entire distribution, you’ll need to come up with that extra 20% from your other funds (you’ll be able to recover the withheld taxes when you file your tax return).

The direct rollover

The second type of rollover transaction occurs directly between the trustee or custodian of your old retirement plan, and the trustee or custodian of your new plan. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution. Trustee-to-trustee transfers avoid both the danger of missing the 60-day deadline and, for employer plans, the 20% withholding problem.

With employer retirement plans, a trustee-to-trustee transfer is usually referred to as a direct rollover. If you receive a distribution from your employer’s plan that’s eligible for rollover, your employer must give you the option of making a direct rollover to another employer plan or IRA.

A trustee-to-trustee transfer (direct rollover) is generally the most efficient way to move retirement funds. Taking a distribution yourself and rolling it over makes sense only if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.

Should you roll over money from an employer plan to an IRA?

In general, you can keep your money in an employer’s plan until you reach the plan’s normal retirement age (typically age 65). But if you terminate employment before then, should you keep your money in the plan (or roll it into your new employer’s plan) or instead make a direct rollover to an IRA?

There are several reasons to consider making a rollover. In contrast to an employer plan, where your investment options are limited to those selected by your employer, the universe of IRA investments is almost unlimited. Similarly, the distribution options in an IRA (especially for your beneficiary following your death) may be more flexible than the options available in your employer’s plan.

On the other hand, your employer’s plan may offer better creditor protection. In general, federal law protects your total IRA assets up to $1,245,475 (as of April 1, 2013)–plus any amount you roll over from a qualified employer plan–if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in an employer retirement plan generally enjoy unlimited protection from creditors under federal law, regardless of whether you’ve declared bankruptcy.

Rollover from: Rollover to:
Traditional/SEP-IRA SIMPLE IRA Roth IRA Qualified Plan (incl. 401k) Roth 401k/403b/457b account 403b Plan Governmental 457b Plan
Traditional/SEP-IRA-Taxable dollars1 Yes2 No Yes3 Yes7 No Yes Yes9
Traditional IRA – nontaxable dollars1 Yes2 No Yes4 No No No No
Simple IRA1 Yes5 Yes Yes3,5 Yes5,7 No Yes5 Yes5,9
Roth IRA1 No No Yes2 No No No No
Qualified Plan – taxable dollars (incl. 401k)6,7 Yes No Yes11 Yes No12 Yes Yes9
Qualified Plan – nontaxable dollars (incl. 401k)6,7 Yes No Yes Yes8 No12 Yes8 No
Roth 401k Account6,7 No No Yes No No10 No No
Roth 403b/457b Account6 No No Yes No No10 No No
403b Plan – taxable dollars6 Yes No Yes11 Yes7 No12 Yes Yes9
403b Plan – nontaxable dollars6 Yes No Yes Yes8 No12 Yes8 No
Governmental 457b Plan6 Yes No Yes11 Yes7 No12 Yes2 Yes

1Required distributions and nonspousal death benefits can’t be rolled over.

2In general, you can make only one tax-free, 60 day, rollover from one IRA to another IRA in any one year period no matter how many IRAs (traditional, Roth, SEP, and SIMPLE) you own. This does not apply to direct (trustee-to-trustee) transfers, or Roth IRA conversions. (A special rule applies to 2014 rollovers.)

3Taxable conversion

4Nontaxable conversion

5Only after employee has participated in SIMPLE IRA plan for two years.

6Required distributions, certain periodic payments, hardship distributions, corrective distributions, and certain other payments cannot be rolled over; nonspousal death benefits can be rolled over only to an inherited IRA, and only in a direct rollover.

7May result in loss of qualified plan lump-sum averaging and capital gain treatment.

8Direct (trustee-to-trustee) rollover only; receiving plan must separately account for the after-tax contributions and earnings.

9457(b) plan must separately account for rollover–10% penalty on payout may apply.

10Nontaxable dollars may be transferred only in a direct (trustee-to-trustee) rollover.

11Taxable dollars included in income in the year rolled over.

12401(k), 403(b), and 457(b) plans can also allow participants to directly transfer non-Roth funds to a Roth account if certain requirements are met (taxable conversion).

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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