A Few Quick Tips.
Let’s say you’re ready to make a change in your retirement plan and need to roll over your IRA to a new account. What are the most important things to remember? And what mistakes should you avoid?
We’ve got you covered! First, a few tips from the experts about what to do when rolling over your IRA.
Set up the withdrawal.
To do a rollover, you can withdraw all the funds and close the account, or you can do a partial transfer.
Your provider will likely refer to this as an “early distribution” or “premature withdrawal” if you’re under 59½, but this does NOT mean you’ll get hit with taxes and penalties. It’s simply the IRS terminology for a distribution before age 59½.
Use the right account.
To keep things simple, you can either have your old provider directly deposit these funds into the bank account you have linked to Betterment, or simply deposit the check your provider sends you into that linked account within 60 days, per IRS rules.
What if you want to do an electronic funds transfer, but you have an old bank account linked to your old IRA?
A) You can move the funds to that account and then transfer the money to the account linked to Betterment, then complete the rollover.
B) You may be able to link your Betterment-linked account to your old provider, then move the funds and complete your rollover. (Note that this could be time-consuming, if the company requires further account verification.)
Don’t withhold taxes.
Whether you do the rollover electronically or with a live representative, you need to inform your IRA provider that you do not want any taxes withheld. You are not required to withhold taxes, as you’re going to redeposit the funds as soon as you get them (within 60 days, per IRA rules).
Mind the fees.
Some companies may charge you a transaction fee to liquidate your account, a surcharge if you close the account, or a fee for sending a paper check. Be sure to ask (or read the FAQ) so that you know what you’re paying. These costs typically apply when you do any sort of rollover—think of them as a fond farewell from your old provider.
Claim the rollover on your tax form.
Your old provider will alert the IRS that you’ve withdrawn funds from your IRA, which is standard procedure, so be sure to enter the amount on your return at tax time. Consult with a tax advisor, if you have any doubts about how to do this, or familiarize yourself with the applicable rules in IRS Publication 590.
– via Betterment
Don’t Fall For These Mistakes
As with anything financial, there are pitfalls you want to avoid. Here are just a few to keep in mind.
If you’re worried about keeping track of the details and making the right decisions, ask your financial advisor to help out. For some people rolling over their IRA is a piece of cake, but others prefer a professional to do the heavy lifting.
The 60-Day Rule
After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. If you do not complete the rollover within the time allowed, or receive a waiver, or extension, of the 60-day period from the Internal Revenue Service (IRS), the amount will be treated as ordinary income in the IRS’s eyes. That means you must include the amount as income on your tax return, where any taxable amounts will be taxed at your current, ordinary income tax rate. Plus, if you did not reach age 59.5 when the distribution occurred, you’ll face a 10% penalty on the withdrawal.
One-Year Waiting Rule
Within one year, after you distribute assets from your IRA and roll over any part of that amount, you cannot make another tax-free rollover of any IRA. This law changed due to a 2014 Tax Court decision.
Previously, the one-year rule only applied to making additional rollovers from the same IRA to another (or the same) IRA. Here’s how it used to work: Imagine that you have two IRAs – IRA-1 and IRA-2 – and you make a tax-free rollover from IRA-1 into a new IRA (IRA-3). Within one year of the distribution from IRA-1, you cannot make another tax-free rollover from IRA-1 or from IRA-3 into another IRA. However, you could roll funds out of IRA-2 into any other IRA, because you did not roll money into or out of that account within the previous year.
Under the new rules, you can’t roll funds out of IRA-2 either, until the one-year time period has passed.
The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b) or 457(b) account within a year. (Note: This one-year limit also does not apply to rollovers from Traditional IRAs to Roth IRAs, i.e. Roth conversions.)
RMDs Not Eligible for Rollover
You are allowed to make tax-free rollovers from your IRAs at any age, but if you are 70.5 or older, you cannot roll over your annual required minimum distribution (RMD), as a rollover of a RMD would be considered an excess contribution.
If you are required to make a RMD each year, be sure to remove the current year’s RMD amount from your IRA before implementing the rollover.
Same Property Rule
Your rollover, from one IRA or to another IRA, must consist of the same property. This means that you cannot take cash distributions from your IRA, purchase other assets with the cash and then roll over those assets into a new (or the same) IRA. Should this occur, the IRS would consider the cash distribution from the IRA as ordinary income.
– via Investopedia
Are you happy with your current IRA, or do you want to roll over into a more profitable account?