How to Rollover Retirement Funds

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Many retirement accounts such as 401ks and IRAs allow for significant tax advantages for those saving towards retirement. As a result, they are a popular retirement investing strategy. However, sometimes it is necessary to change from one retirement account type to another. Doing so can cause significant taxes and penalties if not done correctly, so it is very important to understand how to handle it. Rolling over retirement funds is one way to move funds to a new account type without penalties.

Determine what type of account you currently have. Most retirement accounts can be rolled over into an IRA. However, there are exceptions. A Roth IRA for example, cannot be rolled over it must be converted under a different procedure. Accounts like 401(k), 403(b), SEP IRAs, and SIMPLE IRAs over two years old can be eligible for a rollover.

Open the retirement account the retirement funds will be transferred into. There is a tight time limit on making the deposit into this account, so it is important that any glitches be resolved before initiating the rollover. When the account is opened and you have the account number then you can proceed to start the rollover.

Inform the custodian of the original retirement account that you will be doing a rollover and withdraw your funds from the account. Do not have any money withheld for taxes unless it is required by the custodian.

Deposit the funds into the new retirement account within 60 days. The IRS has become much less lenient on granting exceptions, so don't expect one. You have 60 days to deposit the funds in the new account.

Keep the statements from both companies for the month of the rollover for tax purposes.

Write down the rollover on your tax filing for the year. A rollover contribution does not result in a special form from either custodian. Rather, the taxpayer is required to note the rollover on Form 1040 by entering the value of the rollover and writing the word "rollover" next to the line.

Tips & Warnings

  • Many people could benefit more from doing a trustee to trustee transfer of retirement funds. Ask your adviser, or company representative if that option is available to you.
  • If the rollover is not completed within 60 days, you could be subject to significant taxes and penalties. Many 401(k) plans require that 20% of the balance be withheld for taxes. You will not get this money back until you file your taxes, but you still must deposit 100% of the original balance within 60 days to avoid taxes and/or penalties. That means that you must deposit the 20% withholding from your own funds. To avoid this, do a trustee-to-trustee transfer instead.

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