What Is A Rollover?

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Some companies allow you to leave money in their plans until you reach retirement age. Others require you to move your money. You could take a lump sum payout, but that involves federal income taxes and penalties. Or, you could roll the money over into an IRA, maintaining the federal income tax-deferred status of your retirement savings and avoiding federal income taxes and penalties.

When rolling money over from a qualified plan, you can place it into an existing IRA or into a new, separate IRA. It may be best to keep the rollover separate. You may someday want to move the funds to another employer-sponsored plan, and some companies do not allow the rollover of combined assets. Although you can make contributions to a rollover IRA, doing so may mean you cannot roll the IRA into a new employer-sponsored plan.

IRA Withholding Tax And Direct Rollovers

If you change jobs or retire and take an early withdrawal from your 401(k) retirement savings, the company is required to withhold 20 percent of your 401(k) savings for federal income tax purposes. This applies only to qualified retirement plans, including 401(k) plans 403(b) plans and other profit-sharing plans.

You can avoid the 20 percent IRA withholding law with a 100 percent direct rollover into your IRA. Simply request your prior employer to pay all of your retirement plan distribution directly into your rollover IRA account.

• You can recapture the withheld amount if you deposit your retirement assets into a rollover IRA within 60 days. The deposit must equal the amount of your distribution, plus the 20 percent withheld by your employer. If you do not add the withheld amount, it will be considered a distribution and taxed as ordinary income. In addition, the amount may also be subject to a 10 percent early withdrawal penalty.



• By funding your rollover IRA within 60 days with 100 percent of your retirement plan payout, you will receive the 20 percent withheld by your employer as a tax credit when you file your federal income tax return.

• No. Internal Revenue Service (IRS) rules do not allow borrowing from an IRA. IRS rules only allow distributions, which may be taxable for federal income tax purposes.



• You could use a 60-day rollover to temporarily take funds from your IRA. But if you do not re-deposit the money in a retirement account within 60 days, you are liable for federal income taxes on the amount withdrawn, plus a 10 percent penalty if you are under age 59½.

• A key change for 2010 is the elimination of the $100,000 income limit for the conversion of a traditional IRA to a Roth IRA. What this means is that if an individual's modified adjusted gross income (MAGI) exceeds the IRS level to contribute to a Roth IRA in 2010, they can still contribute to a traditional IRA and immediately convert the traditional IRA over to a Roth IRA. The amount converted may be taxable for federal income tax purposes.