Changing Jobs? Here Are Some IRA Rollover Basics

new-job-signAccording to a 2010 article in the Wall Street Journal, the average American worker changes jobs 7 times during their career. Averaging just over 4 years at each employer! With all those employers, what do you do with your retirement savings?

Here are your choices regarding your retirement savings:

1. Do Nothing: Generally if you have more than $5,000 in the employer’s plan you can maintain your account with them. You can continue to manage the money and investments without any interruption. No new contributions will be permitted though.

2. Transfer to new employer’s plan: If you are changing jobs, you can request a transfer of your retirement funds to the new employer’s plan. Just some paperwork from the new plan will be required.

3. Cash Out: Not my favorite option for most job changers. If you withdraw the funds you will be subject to taxes, and if you are under 59 1/2 an additional 10% penalty for early withdrawal may be assessed.

4. Rollover: This is one of the best choices because it gives you more investment selection flexibility. Literally the sky is the limit. It also allows you to maintain control and hire a professional advisor. Plus, you can make IRA contributions to it as well.

What is a Rollover IRA you ask?
A rollover IRA is a type of retirement account where you can transfer assets from an employer-sponsored retirement plan, such as a 401(k), after you leave that employer. You can have a rollover IRA at any institution from a brokerage firm, bank or insurance company. There are two types of rollovers IRAs: Traditional and Roth.

Should You Use a Rollover IRA?
Absolutely! It really makes sense in most cases and provides you with maximum flexibility. Don’t do a rollover for the following reasons:

  • You love your former employer’s plan investments and they will let you keep it there
  • You like the new employer’s retirement plan

Rollovers make sense because you avoid any taxes and penalties. A Rollover IRA will allow the money to continue to grow on a tax-deferred basis, and as previously mentioned, your investment choices expand beyond the 10-30 options in your current retirement plan.

How Do I Roll Over My Existing Retirement Plan into a Rollover IRA?
Here is a 3 step process for getting your retirement plan at your old employer rolled over into a Rollover IRA:

1. Establish a Rollover IRA account
Contact a financial advisor and open an IRA account. Get the details pertaining to who the custodian will be as well as their address. In addition, you will need your new account number. The majority of the time, this is the information you will need to record on the current employer’s rollover paperwork.

2. Contact Your Former Employer
You will need to request forms to do a rollover. In most cases, if you have been gone for some time, the forms may have been forwarded to you already. If not, request the forms and indicate a direct rollover. If they cut you a check, make sure it is made payable to your Rollover IRA provider and not you. Both will be fine on the check also.

3. Check Payable to You?…bad idea!
If your employer issues the check to you, they will be required to withhold 20% of your balance. You may even be subject to the 10% penalty at the time of the rollover. If this happens, ask the former employer to cancel it and reissue the check in the name of the custodian of the IRA. If they will not accommodate you, then you can avoid the 10% penalty as long as you rollover the balance into the Rollover IRA within 60 days. Try to select the Direct Rollover option on your paperwork to avoid this headache.

Don’t forget about your former employer retirement plans. Rollover these funds to a Rollover IRA or Roth IRA when you leave. If you need some help with your rollover write me at david@lexwealth.com, or call me at (859) 225-2596.