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“Rolling” an Old Retirement Plan to an IRA

Posted By Alejandra Owens On June 26, 2008 @ 2:50 pm In Money & Savings | 1 Comment

If you’re leaving an employer, what should you do with the money in your retirement plan?
Regardless of why you’re leaving — you’re retiring, you found a new job, you quit, you were fired, whatever — we routinely recommend that you move the money to an IRA account. This is true regardless of what kind of retirement plan you have — 401(k), 403(b), 457, TSP, etc.
Moving the money from a former employer’s plan to an IRA has several advantages: You gain the ability to select from a potentially unlimited number of investment options, and you enjoy complete control over your account, with no interference from a Human Resources or plan administrator.
When people move money from an employer plan to an IRA, they frequently refer to the transaction as a “rollover.” But that term is rather inaccurate. A true rollover occurs only when your employer sends you a check for the account balance that’s made payable to you. In this case, you’d deposit the check and write a new one, which you’d forward to your IRA account. Rollovers must be completed (meaning the money must be deposited into the IRA) within 60 days; otherwise, you’ll owe taxes (plus a 10% IRS penalty if you are under age 59½ at the time of the rollover). To make matters worse, employers typically withhold 20% of the funds when sending you that check. It’s hard to roll over money that you never get — making it more likely that you’ll incur taxes and penalties!
Fortunately, there’s an easier way to move money out of that employer plan. Simply sign a form your employer can give you, authorizing a “direct transfer.” The form instructs your employer to send the money in your retirement account directly to your IRA. This is easy (you just sign the form) and stress-free (there’s no 60-day deadline). Plus, your employer will not withhold 20% of your money!
Sometimes, employers send “transfer” checks to the employee (you) instead of directly to the IRA. Have no fear: As long as the check is payable to the IRA trustee or custodian, it’s considered a transfer and not a rollover. It’s OK even if your name appears on the check. (Your name should be preceded by the initials FBO, which means “For the Benefit Of.”)
Thus, if you receive such a check, don’t deposit or sign it. Instead, just mail it to your IRA. You’ll get confirmation shortly, showing that the money has been deposited into your account.
Then, sit back and relax, knowing that your retirement assets are working for you.
By Ric Edelman [1]


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[1] Ric Edelman : http://www.ricedelman.com/

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