Retirement Plan Rollovers Made Easy
Changing jobs creates a great opportunity to roll over from your former employer’s plan into an IRA. Plus, it usually provides you with more investment options than you might otherwise have if you were to leave the money in your former employer’s plan or roll into your new employer's plan.
Chances are you will have to roll over a retirement account at least once in your lifetime. Here are a couple of pointers that will help you complete a successful rollover —
1. Avoid the 20% Withholding Trap
If you ask, your company will send you a check for the full vested balance of your account – but beware! If the company makes the check out to you, 20% must be withheld for taxes and you will have to make up the missing 20% out of pocket and even pay a 10% penalty on the withdrawal if you’re under age 59½. In addition, you won't get the withheld money back until you file your taxes the following year (and that assumes your salary withholding and any other tax payments for the year exactly equal your tax bill).
You can avoid the 20% withholding by requesting a "direct rollover", also known as a "trustee-to-trustee rollover". This simply means the administrator of the retirement plan at your old company makes your distribution check payable to the trustee/custodian of your rollover IRA, the account that you want to receive your rollover funds. The check would be made payable as, "Equity Trust Company, d/b/a Sterling Trust, Custodian for benefit of John Q. Public IRA."
To initiate a direct rollover, you'll need to notify the plan administrator that you wish to make a direct rollover. The plan administrator will usually require you to fill out its distribution/rollover form, which generally includes a space for you to give instructions on how the distribution check should be made payable.
When you receive the check, simply deposit it with the custodian of your rollover IRA within 60 days of receipt. To meet the 60-day rule, start counting on the day after you receive the check and include the day you deposit the money into your IRA. For example, if you get the check on September 1, you must deposit the rollover funds in your IRA on or before October 31. There is no extension for weekends or holidays.
2. What Comes Out Must Go Back In
If you withdraw cash from your qualified retirement plan, you must roll over the same amount of cash into your rollover IRA - and the same is true if you take an in-kind distribution of an asset from your retirement plan. You must rollover the same exact asset, rather than another asset (even if of equal value). This is known as the “same property rule” and it goes for rolling over from one IRA to another or from a qualified retirement plan to an IRA.
Here's a good example – if you withdraw cash from a retirement plan or IRA and use the money to purchase a stock or other investment, you can not rollover the shares of stock or the investment. Likewise, if you withdraw shares of stock or other investment in-kind from a qualified plan or IRA account, you can not sell it and rollover the equal amount of cash.
The basic premise for a tax-free rollover is that you rollover exactly what was distributed to you, and in the same manner as you received it from the plan or IRA — within the allowed 60-day window. You can avoid paying income taxes on the withdrawal and avoid a possible 10% premature penalty (if under age 59½) by rolling over the same property.
Let our team of IRA professionals help with your IRA rollover needs. Call our Sales Group at 800.955.3434, option 5, or send an email to STCServices@SterlingTrustCompany.com.