A rollover is the movement of funds from one retirement vehicle to another.
You may want to make a rollover for any number of reasons — your
employment situation has changed, you want to switch investments, or you've
received death benefits from your spouse's retirement plan.
Learn More https://www.higginscapital.com/Individual-Retail-Investors.21.htm
There are two possible ways that retirement funds can be rolled over — the
indirect (60-day) rollover and the direct rollover (or trustee-to-trustee
transfer).
The indirect, or 60-day, rollover
With this method, you actually receive a distribution from your retirement plan
and then, to complete the transaction, you deposit the funds into the new
retirement plan account or IRA. You can make a rollover at any age, but there
are specific rules that must be followed. Most importantly, you must generally
complete the rollover within 60 days of the date the funds are paid from the
distributing plan.
If properly completed, rollovers aren't subject to income tax. But if you fail
to complete the rollover or miss the 60-day deadline, all or part of your
distribution may be taxed, and subject to a 10% early distribution penalty
(unless you're age 59½ or another exception applies).
Further, if you receive a distribution from an employer retirement plan, your
employer must withhold 20% of the payment for taxes. This means that if you want
to roll over the entire distribution amount (and avoid taxes and possible
penalties on the amount withheld), you'll need to come up with that extra 20%
from other funds. You'll be able to recover the withheld amount when you file
your tax return.
The direct rollover, or trustee-to-trustee transfer
The second type of rollover transaction occurs directly between the trustee or
custodian of your old retirement plan, and the trustee or custodian of your new
plan or IRA. You never actually receive the funds or have control of them, so a
trustee-to-trustee transfer is not treated as a distribution. Direct rollovers
avoid both the danger of missing the 60-day deadline and the 20% withholding
problem.
If you stand to receive a distribution from your employer's plan that's eligible
for rollover, your employer must give you the option of making a direct rollover
to another employer plan or IRA.
A trustee-to-trustee transfer is generally the most efficient way to move
retirement funds. Taking a distribution yourself and rolling it over may make
sense only if you need to use the funds temporarily, and are certain you can
roll over the full amount within 60 days.
Should you consider a rollover?
In general, if your vested balance is more than $5,000, you can keep your money
in an employer's plan at least until you reach the plan's normal retirement age
(typically age 65). But if you terminate employment before then, should you
consider a rollover to either an IRA or a new employer's plan? There are pros
and cons to each move.
IRA: In contrast to an employer plan, where investment options are typically
limited to those selected by the employer, the universe of IRA investments is
almost unlimited. Similarly, the distribution options in an IRA (especially for
your beneficiary following your death) may be more flexible than the options
available in your employer's plan.
New employer's plan: On the other hand, employer-sponsored plans may offer
better creditor protection. In general, federal law protects IRA assets up to
$1,362,800 (scheduled to increase on April 1, 2022) — plus any amount rolled
over from a qualified employer plan or 403(b) plan — if bankruptcy is declared.*
(The laws in your state may provide additional protection.) In contrast, assets
in a qualified employer plan or 403(b) plan generally receive unlimited
protection from creditors under federal law, regardless of whether bankruptcy is
declared.
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