How to Transfer a Profit Sharing Plan to an IRA

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Although profit-sharing plans are being replaced more and more by 401k and other types of retirement plans, many companies still utilize them, particularly large multi-national firms. As employees do not contribute to profit-sharing plans, you may not even be aware that your company maintains a plan for your benefit until you change jobs. At that point, rather than taking a distribution from the plan, most investors opt to roll their proceeds into an Individual Retirement Account (IRA), which is a relatively straightforward process.

  • Establish a rollover IRA account. If you plan to transfer your funds to an IRA, you need to have an open account to receive the distribution. Any bank or financial services firm should be able to open an account for you. Information you will need to provide to open the account includes your name and address, date of birth and Social Security number, and investment experience and objectives. Additionally, you will be asked to provide similar information for an account beneficiary of your designation. Instruct the firm that you will be receiving a profit-sharing plan distribution shortly to fund the account.

  • Contact your profit-sharing plan administrator. If you have left your job for any reason, you may have already been contacted by the administrator, who will want to know how you want your plan proceeds distributed. Generally, the options are either to distribute the proceeds directly to you or to transfer them to another retirement plan. The easiest way to transfer your plan to an IRA is to have the administrator perform a trustee-to-trustee transfer, where you never take receipt of the funds and they are directly deposited into your IRA. A second way is to take receipt of the distribution and redeposit it in your IRA within 60 days of receipt. Known as a "rollover," this is a more complicated option because you run the risk of tax consequences if you fail to make the deposit within 60 days. Specifically, any amount not redeposited within the 60-day window is treated as a fully-taxable distribution. Additionally, for a rollover, you will be issued a 1099-R at year-end, which must be reported on your taxes, even though the rollover itself is a tax-free transaction. For direct trustee-to-trustee transfer, no such tax reporting is required.

  • Follow up on your transfer. If you chose to receive the distribution outright, make sure that your deposit is accepted into your IRA within the 60-day window. When you receive your 1099-R at year-end, confirm that the listed amount matches the amount that you received from your plan. If you are performing a trustee-to-trustee transfer, check to see that the full amount of your profit-sharing plan balance is received by your IRA custodian, and that none of it is reported as a taxable transaction.

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