Generally a rollover occurs when an individual leaves their job and accepts a new employment and wishes to move their 401k or other retirement account assets to a new company, or to an individual IRA. The purpose of a rollover is to defer taxation and avoid the early distribution penalty.
Your best bet when rolling your funds over is to do a direct rollover also called a trustee- to –trustee transfer. This is an important process to follow because the tax penalties are quite unattractive if the transfer is not completed properly. If a participant receives a direct transfer ,a check, there are two things to be aware of:
- The distributing plan must withhold 20% which is then paid to the IRS
- The 60 Day rule: The initial transfer from the qualified plan is only tax deferred if the direct distribution is transferred into another qualified plan or rollover IRA no later than the 60th day after the distribution from the plan
So you can see that to ensure tax-deferred treatment on the entire rollover amount it is best to do a direct rollover. The former plan’s trustee convey’s the funds directly to the new plan, the employee never taking a check made out to him.
Some of the permissible rollovers:
- A distribution from a qualified plan to another qualified plan
- A distribution from a 403(b) to a qualified plan or IRA
- A distribution from a SIMPLE IRA may be rolled over to any eligible retirement plan
- After two years of participation; during the first two years of participation it may only be rolled into another SIMPLE IRA.
- A QDRO distribution to a spouse, former spouse or alternate payee may be rolled over into an IRA or another qualified plan.
It is important to properly evaluate your portfolio. Brown Wealth Management can assist you in doing so.
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