If you receive a disbursement of funds from a benefits package or retirement fund before retirement age, you could be liable for taxes and penalties unless you act within a relatively small window of time. Whether you are changing employers or have received an early disbursement of retirement funds for another reason, you can avoid loss if you know the rules.
Rule 1: The Window for Rollover Is 60 Days
The window for rolling over retirement funds paid directly to you is 60 days, otherwise you may find yourself paying a penalty and income tax on the amount received. What this means is that you basically have 60 calendar days to roll it over into another qualified IRA account to avoid taxes and save it for your own future.
If it is possible, the best route could be a trustee-to-trustee transfer. This option allows you to transfer the funds from one custodian account at a financial institution into a new or already existing IRA account of similar type at another institution, without paying taxes on the amount received. The transfer is done without you ever having to touch the money. Out of sight, out of mind. A great way to preserve your own future retirement savings.
The important number to remember is 60 – especially if you are in direct receipt of the funds, a.k.a., a check that has been sent to you or deposited into your savings account. During the 60 days, take your time to research your options, consult your tax advisor (please do this!), compare investment fees and expenses, and locate an appropriate account for your retirement funds.
Rule 2: Taxes Are Withheld From Your Disbursement (unless you opt out)
In general, disbursements are made by check. At this time, your employer or the custodian or trustee of the account is required to withhold a percentage of the distribution for taxes. Prior to receiving the disbursement, you will be provided with a distribution form, which will offer you the choice to have taxes withheld from the disbursement or to opt out of the withholding requirement.
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Rule 3: Your Age Matters
If you are under the age of 59.5, you can be hit with an additional 10% or greater penalty for early distribution. The penalty can be as high as 25% for some distribution types from a SIMPLE IRA. You can read more about the penalties associated with different types of retirement accounts at the Internal Revenue Service website.
Rule 4: There Are Exceptions
There are some types of funds that cannot be rolled over. Once you reach 70.5 years of age, you must take a required minimum distribution that you cannot roll over to another retirement plan. Nor can you rollover hardship distributions you have requested. You can’t roll over loans that are treated as a distribution, dividends on employer securities, or distributions you have received to pay insurance costs. You will find a comprehensive list of these exceptions at the IRS website.
To be clear, the article you’ve just read is about indirect IRA rollovers, in which the money from your retirement account has already been disbursed to you. If the money has not been disbursed to you, you may be able to roll it over directly to a new account through a trustee-to-trustee transfer. It’s highly recommended that you seek consultation from a financial advisor and/or tax consultant if faced with this situation. While the trustee-to-trustee transfer is usually viewed as the simplest and easiest way to transfer and preserve your retirement savings, there are other options that may work best for your circumstances.
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