Avoid paying steep taxes and penalties when moving your retirement money.Like what you hear? Help us out by writing a review at iTunes. Questions go to money@qdnow.com. Thank you!
Money Girl
134 MG Retirement Rollovers Can Be Tricky
Hey, Fidelity. What's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hmm, that's music to my ears. I can only talk. Investing involves risk, including risk of loss. Zero account fees apply to retail brokerage accounts only. Sell or assessment fee not included. A limited number of ETFs are subject to a transaction-based service fee of $100. See full list at Fidelity.com/commissions. Fidelity brokerage services LLC member NYSE SIPC. A Capella University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think. With Capella University, learn more at Capella.edu. Hi everyone, I'm Laura Adams, and you're listening to Money Girls quick and dirty tips for a richer life. The topic for this episode is about doing retirement plan rollovers. In last week's show, I mentioned that a rollover is one of the best options for your workplace retirement plan when you leave a job. Even though doing a rollover sounds like a cute dog trick, don't underestimate its ability to save you some serious money on taxes. A tax-deferred rollover occurs when you withdraw cash or assets from one eligible retirement plan and contribute it to another eligible retirement plan within 60 days. When handled correctly, doing a rollover is the best way to move money between retirement accounts. But, when not handled correctly, taking money out of a retirement plan can be expensive. I'll tell you how to avoid paying tax penalties when moving your retirement funds. Just so you know, in this show, I'm only going to discuss traditional retirement accounts. There are different rules for raw accounts, so I'll save that topic for a future podcast. If you're a regular show listener, you already know that withdrawing money from a traditional retirement account before you reach the official retirement age of 59 and 1/2 is a bad idea. That's because non-qualified withdrawals are usually subject to income tax as well as a 10% early withdrawal penalty. Doing a rollover is great because it allows you to take money out of a retirement plan, such as a 401k, 403b, 457, or an IRA, and maintain the tax-deferred status of the funds. Even though a rollover isn't a taxable event, you still have to report it on your federal income tax return. As soon as you leave a job or prepare to leave, the first step to rolling over eligible retirement funds is to request a distribution form from your employer. Next, you'll need to make a plan for where you want the money to go. Here's my quick and dirty tip, open up a new IRA for your rollover funds. You can leave the money in the IRA for the long term, or you can roll it over again into most workplace plans once you're eligible to participate. You can leave all the rollover money in an IRA and still contribute to a new employer plan. If you have multiple retirement accounts, as long as you don't exceed the allowable contribution limits each year, consider whether the IRA or a new employer plan is the best place to keep your rollover money. An IRA always gives you more control over your money and usually has many more investment options and flexibility when compared to that of a typical workplace plan. So you'll probably benefit more from keeping your retirement savings in an IRA instead of rolling it over into a new workplace plan. For new retirement contributions, if you have a workplace plan that offers matching funds from your employer, always contribute to it first before sending money to an IRA. It's important to take advantage of employer matching because those funds are an instant return on your investment. There are two ways to do a retirement rollover. Number one, the funds are made payable to you. You deposit the money in a personal account and then pay it to the custodian of your rollover account within 60 days. Number two, the funds are immediately made payable to the custodian of your retirement account. The second way is what I recommend, it's called a direct rollover. I prefer direct rollovers for two reasons. Here's the first, when you take a retirement distribution in your name, it's always subject to mandatory withholding of 20%, even if you intend to roll it over in time. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science, and social studies. 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With direct rollovers, there's never any withholding taken out. Consider this example. Let's say you leave your job and have $10,000 in your 401(k). Maybe you're not sure where you want to move those funds, but you know you want to do a rollover. So you would like to have the $10,000 distribution made payable to you. When you get the check from the retirement account, it's only $8,000. That could be a big shocker if you're not familiar with how a rollover works. The trustee of your employer's plan is required to withhold 20% of all taxable distributions made to plan participants. So 20% or $2,000 of your $10,000 account ballots automatically got shipped off to the government to pay your federal income taxes, even if you plan to complete a rollover within the allowable 60-day period. If you don't have $2,000 of your own money to replace the withheld amount, you'll only be able to roll over the $8,000 you received. If you complete the rollover in time, the withheld amount will come back to you as a tax refund when you file your income taxes the following year. But during that entire time, your $2,000 is being held by the government instead of working for you in your retirement account. The second reason I prefer a direct rollover to taking a retirement distribution in your own name is that if you happen to miss the 60-day deadline for completing the transaction, the money gets included as income to you. As I mentioned, that means not only having to pay income tax, but also having to pay an early withdrawal penalty. So a direct rollover works to your advantage because it leaves less room for a potential tax error to occur and doesn't require mandatory tax withholding. If you ever have questions about doing a rollover, it's important to get advice from your retirement plan custodian. They can walk you through the process and make sure you don't break the rules and end up with a rollover that you wish you could do over. For more about retirement, be sure to get my audiobook "Money Girl's Guide to Retirement Planning." It's full of advice, resources, and quick tips to help you take control of your financial destiny. It's on sale at audible.com and in the iTunes Store. I'm glad you're listening. Shoo-choo! That's all for now. It's Wal-Mart Plus, it's Wal-Mart Plus for your delivery, which saves members time plus money. Yup! Plus an included Paramount Plus subscription to stream movies, show, sports, and that can't miss documentary. Plus Burger King savings. If that's right, members get 25% off Burger King Digital Orders every day of the week. Wal-Mart Plus, it's Wal-Mart Plus. 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