Circumstances change. Decisions you made yesterday about your retirement money may need to be adjusted for today. That's where a Traditional Rollover Individual Retirement Account (IRA) comes in.
Investors generally open a Traditional Rollover IRA when they change jobs or retire and want to take a distribution from their employer's retirement plan but continue to keep the money tax deferred and avoid potential IRS early withdrawal penalties. What's important to know is that there are different ways to take this distribution.
Roll Over Directly
Your first option is to roll over your eligible retirement plan savings directly into a Traditional Rollover IRA. This choice allows you to keep 100% of your retirement savings working for you by avoiding IRS early withdrawal penalties and current taxes.
Roll Over Within 60 Days
A second choice is to have the distribution check made out directly to you. You then have 60 days to deposit the money into a Traditional Rollover IRA before taxes and IRS penalties kick in. In this case, your distribution check will be for 80% of your savings because your former employer is required to withhold 20% for federal taxes. So, when you open a Traditional Rollover IRA, you will need to add the 20% back in yourself if you want to keep 100% of your eligible rollover assets and, if you are under 59½, if you want to avoid paying a 10% IRS early withdrawal penalty on that 20%. However, depending on your tax situation, you may be entitled to claim a refund of 20% when you file your taxes.
Taking Your Cash Distribution
Your final option is to have the distribution check made out directly to you and not roll it over. This is generally the least advantageous option because by keeping the money you will lose 20% to taxes and, if you are under 59½, 10% to an IRS early withdrawal penalty and the entire amount will be considered taxable income.
*Chart does not account for money owed for taxes, which could further reduce amount left to spend.
For more information, contact a Financial Advisor.