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Other Articles
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IRA
IRA Rollovers Can Help Manage Change
By John Armstrong
Financial Advisor, Morgan Stanley
If you're changing jobs, it's important to understand the options you have for managing your IRAs.
With employees changing jobs more frequently than ever before, it’s rare to find someone who has worked his or her entire life for the same company. Whether or not you have recently changed jobs or you have retired from your long-time employer, you should know that you may be facing some complicated tax rules and potentially significant tax consequences if you decide to take your retirement assets out of your current retirement plan.
Funds received from an employer plan distribution will likely represent a significant portion of your liquid financial assets. As a result, they deserve all the time and attention you can afford to give them. We’ve outlined below some of the key issues you should keep in mind when thinking about rolling over your IRA. If you’d like more information on how to make the best financial use of your distribution, please contact your Financial Advisor.
Managing Your Lump-Sum Distribution
Many employees, upon changing jobs or retiring, find themselves eligible for a distribution from their employer-sponsored retirement plan, which can include, among other types, an Internal Revenue Code section 401(k), defined benefit pension, or Code section 457 plans. Deciding on how to make the best use of this money is not an easy task. Just one or two hasty decisions may leave you with a tax bill that could wind up costing you up to 30% of the assets you’ve worked so hard to accumulate.
Mandatory Withholding Tax
The IRS requires that a 20% withholding tax be automatically applied to all lump-sum distributions. If you’d like to avoid this withholding, you can arrange in advance to either do a “direct rollover” to another eligible retirement plan (such as an IRA) or do a trustee-to-trustee transfer to another qualified defined contribution plan (such as a Code section 401(k) plan) with a new employer. You may also take possession of your distribution, and roll over only part of your distribution into an IRA Rollover Account using the balance for whatever purpose you wish. Of course, you’ll still be liable for both the 20% mandatory withholding, plus any additional taxes due on the amount actually distributed directly to you outside of these accounts. (Note that if you choose to rollover into a Traditional IRA, the IRS requires that you begin taking distributions by April 1 of the year after you reach age 70 ½.)
Rollovers Must Be Completed Within 60 Days
If you take a distribution from your qualified plan or IRA and do not directly roll over your distribution, you’ll still have 60 days to weigh your rollover options. After that time, the distribution amount will be considered “earned income” to you and taxes may be owed on this amount when you file you annual tax return. In addition, if you are under age 59 ½, you may also be required to pay a federal 10% early withdrawal penalty tax. If you take a roll over from your employer’s plan and directly receive the amounts, your employer is legally required to withhold 20%, leaving you with 80% of the distribution. You may still roll over the full value of the distribution but must replace the 20% withheld from another source. And you can’t wait until you get a tax refund to roll over the amount withheld.
Rollovers Continue Tax Deferral
If you decide to roll over your retirement assets into an IRA Rollover Account (either directly or within the 60-day period), taxes on your distribution will be deferred until you begin making withdrawals. In addition, any account earnings or gains have the opportunity to grow on a tax-deferred basis. What’s more, a rollover account may offer a variety of investment options—from mutual funds to professionally managed portfolios—which may be suitable for a wide range of investors.
Investments and services are offered through Morgan Stanley DW Inc., member SIPC.
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