Although tax laws have made the Individual Retirement Account (IRA) a highly regulated retirement savings vehicle, the IRA remains the cornerstone of everyone’s retirement planning providing essential flexibility in protecting assets. In this article, we will review the use of the IRA rollover account.
Q: What is an IRA rollover?
A: An IRA rollover enables you to move retirement assets from a qualified plan without subjecting it to a penalty or taxation. This vehicle will preserve the tax-deferred earnings of your savings until you take a withdrawal from the account. In addition, a rollover IRA will enable you to personally manage these assets, thus diversifying your retirement portfolio beyond the qualified plan’s choices.
Q: Who is eligible to take an IRA rollover?
A: You can choose an IRA rollover regardless of whether or not you qualify for a regular IRA. If you receive a lump sum distribution from your employer-sponsored retirement plan, you have 60 days from the date you receive your funds to place the distribution in a rollover IRA and avoid immediate taxation. Any portion of the lump sum distribution that is not rolled over into an IRA will be subject to ordinary income taxes, and possibly penalties.
Q: How do I know if an IRA rollover is right for me?
A: Usually, the larger the distribution and the longer you can afford to set your money aside, the more advantageous an IRA rollover may be. By establishing an IRA rollover, you can possibly avoid a heavy tax burden now, and continue to enjoy the benefits of tax-deferred growth.
Q: Are withdrawals from an IRA subject to 20% federal tax withholding? A: Federal legislation mandates 20% federal income tax withholding for lump sum distributions from a qualified plan. Withdrawals from an IRA are not subject to this requirement. Custodian to custodian asset transfers avoid the issue entirely.
Q: How long may funds remain in my IRA?
A: Indefinitely, but required minimum distributions (RMDs) must begin by April 1st of the year following the year in which you reach age 701⁄2.
Q: When can withdrawals from an IRA rollover take place?
A: Withdrawals can take place at any time. They will be taxed as ordinary income and, if they occur prior to age 591⁄2, they are subject to an additional 10% federal income tax penalty. The 10% penalty tax may be waived in certain qualified situations, such as in the event of disability, or if the distributions are taken in equal and periodic payments over an individual’s life expectancy.
If you are contemplating a retirement plan distribution or rollover in the near future, consult with a qualified financial professional to help ensure your actions are consistent with your financial objectives.
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