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Articles: Learn the “tricks” to IRA rollovers

It is possible to “teach an old dog new tricks.”  Case in point:  If you learn the rules for “rollovers” from a qualified retirement plan to a traditional IRA, you can pull off this timely move without a tax hitch.

Basic premise:  There is no current income tax liability on a distribution from a qualified retirement plan if you roll over the funds within 60 days. For example, if you have a 401(k) account at your job and you are retiring, you can transfer all of the funds to an IRA without paying any tax.

In the not-so-distant past, the rollover rules were much more restrictive than they are now.   For example, you were required to roll over the entire amount in your account balance with a lump-sum distribution. Now you might decide to take advantage of a partial rollover.  Any portion of a distribution that is not rolled over is taxed as ordinary income.

In addition, rollovers could be used only upon separation from service or upon reaching age 59½. Depending on your company, in-service distributions may be permitted.

Nevertheless certain qualified plan distributions are not eligible for tax-free rollover treatment. The list includes

  • annuity payouts (e.g., regular type pension payouts geared to your life expectancy or a period of ten years or more)
  • required minimum distributions (RMDs) required to be made upon reaching the age of 70½
  • payments to someone other than the employee or his or her spouse (e.g., payments to your child as a beneficiary)
  • payments of nondeductible contributions you have made to the plan
  • payments to correct excess contributions or excess defer rals
  • loan amounts treated as distributions by the IRS
  • hardship distributions

Furthermore, if you receive a qualified retirement plan payout, income tax is automatically withheld at a 20% rate, even if you intend to roll over the funds to an IRA within 60 days.

You cannot recoup this amount until you file your income tax return for the year of the distribution. To make matters even worse, you may also be assessed a 10% penalty for withdrawals prior to age 59½.  The penalty is equal to 10% of the taxable portion of the withdrawal.

Key exception:  There’s no withholding requirement for a trustee-to-trustee transfer. For instance, say that you’re age 50 and you are receiving a $100,000 distribution from your retirement plan.  If you have your plan administrator directly transfer the $100,000 to the trustee of the IRA, you avoid both the 20% withholding requirement and the 10% penalty tax.

Depending on your situation, you may be able to avoid unnecessary tax liability.   Show that you still have a few tricks up your sleeve.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.

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