Find out how to move money between retirement accounts tax free.
Money Girl
251 MG What is an IRA Rollover?
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(bell ringing) You probably know that you're typically not allowed to take money out of a retirement account, like a 401(k) or a traditional IRA, without paying taxes or an early withdrawal penalty if you're younger than age 59 and a half. But I'll tell you how to use a rollover to move money or property between most types of retirement accounts, so you avoid those pesky taxes and penalties. A rollover is a tax-free transfer of cash or other assets from one retirement account to another. The most common reason for doing a rollover is when you leave a job and wanna take your retirement funds with you instead of leaving them in your old employer's account. You can't rollover funds from a workplace plan while you're still employed. You have to wait until you say goodbye to your old job. Here are two examples. Sally decides to leave her teaching job to relocate out of state. Though she still has control over her 403(b) retirement funds, she wants more investment options than the plan allows. She decides to rollover the account balance into a traditional IRA where she can choose from thousands of investments and continue to make monthly contributions. John is an attorney who leaves his company and starts working for a new firm. After 60 days, he's eligible to participate in the firm's 401(k) and he's really impressed with it. He decides to rollover funds from his old 401(k) directly into his new 401(k. Both of these situations can take advantage of a rollover, so money is transferred without triggering any taxes or early withdrawal penalties. You can rollover funds from and to most types of retirement accounts. As long as you don't mix pre-tax and post-tax contributions. Remember that contributions to regular or traditional retirement accounts are not taxed, but contributions to Roth accounts are. So you can rollover a pre-tax 401(k) into a traditional IRA, but not into a Roth IRA without paying income tax on the rollover amount. You may have heard of a Roth conversion. That's when you rollover all or a portion of a traditional IRA into a Roth IRA. There's no restriction on your income to make a Roth conversion. However, there is an annual income limit for making contributions to a Roth IRA each year. So when you make too much money, you become ineligible to contribute to a Roth IRA, but there's no income restriction for making contributions to a traditional IRA. As I mentioned, you must pay income tax on any amount you convert from a traditional IRA to a Roth IRA that wasn't previously taxed. But doing a conversion allows you to avoid the 10% additional penalty for early distributions. One of the most important rules to know about making a retirement rollover is that there's a strict time limit to complete it once you receive a distribution check. You must make your rollover or conversion contribution within 60 days, including weekends and holidays. Otherwise, it's considered an early withdrawal and will be subject to ordinary income tax plus a penalty if you're younger than age 59 and a half. So always treat a rollover distribution like a hot potato and be ready to forward it to your new account right away. - In Colorado, our freedoms are everything. Gay to Evans would rip them away. Just like Lauren Bobert, he'd ban abortion without exceptions for rape or incest and overturn the right to marry for same-sex couples. Don't let him take our freedoms. Paid for by DCCC, www.dccc.org, not authorized by any candidate or candidate's committee. ♪ He's better over here ♪ AT&T customers, switching to T-Mobile has never been easier. We'll pay off your existing phone and give you a new one free, all on America's largest 5G network. Visit T-Mobile.com/carrierfreedom to switch today. 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One subscription to IXL gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder IXL is used in 95 of the top 100 school districts. I think the positive feedback that IXL gives is really crucial when it comes to learning. So make an impact on your child's learning, get IXL now and money girl listeners can get an exclusive 20% off IXL membership when they sign up today at IXL.com/moneygirl. Visit IXL.com/moneygirl to get the most effective learning program out there at the best price. When you're ready to do a rollover, simply download a request form from your online retirement account or get it from your account custodian or the benefits administrator at work. You can receive a check made payable to you or one made payable to your new retirement account, which is called a direct rollover. I strongly recommend that you always make a direct rollover. Here's why. When you receive rollover funds in your name, there's an automatic 20% withholding penalty applied, even if you intend to complete the rollover later. Let's say you wanna roll over $10,000 from your 401K. The custodian must withhold 20% for taxes and you'll only get a check made payable to you for $8,000. You can add funds from other sources to equal the amount withheld. For instance, if you have $2,000 in a savings account, you can deposit those funds in your retirement account to replace the missing amount of rollover withholding. If you complete the rollover, you'll eventually receive a refund for the withholding when you file taxes. But the refund could take many months and you lose potential investment gains every day that those funds are not under your control. With a direct rollover where the distribution is made payable to the new retirement account and not to you, there's no withholding, so that's always the best option. At the end of the year, you'll receive Form 1099R or Form 5498 from your account custodian to document the rollover. You can't deduct a rollover distribution from your taxable income, but you have to include it on your tax return. So instead of cashing out an old retirement account and paying unnecessary taxes and penalties, use a rollover to move the money into a new retirement account. That will give you more investment options and allow you to continue making tax advantage contributions, so you build your retirement nest egg as quickly as possible. To learn about my recommendations for the best places to open up your rollover IRA, head over to smartmovestogrowrich.com, where I posted a video and more information on this topic. While you're there, you can find out how to connect with me on social media, like Facebook and Twitter, get free downloads and sign up to work with me for one-on-one financial coaching. If you have a money question or suggestion for a future show topic, I'd love to hear from you. Just email me at money@quickanddirtytips.com. And one more thing, make this the last year that losing weight tops your list of New Year's resolutions. In her new book, How to Win at Losing, Nutrition Diva tackles the 10 biggest weight loss myths that keep you from achieving your goals. Monica is the Diva and she's a licensed nutritionist and dedicated myth buster who separates fact from food fiction and reveals simple strategies that lead to lasting success, available wherever ebooks are sold. I'm glad you're listening to change. That's all for now. Courtesy of Money Girl, your guide to her richer life. (upbeat music) - In Colorado, our freedoms are everything. Gabe Evans would rip them away. Just like Lauren Bobert, he'd ban abortion without exceptions for rape or incest and overturn the right to marry for same-sex couples. Don't let him take our freedoms. Paid for by DCCC, www.dccc.org. 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