Everyone needs to save for a nest egg, but the farther a person is from retirement, the more difficult it often is to be strict about a saving plan. While other financial responsibilities may be higher on your priority list, it’s crucial to remember that the earlier you start to save for your golden years, the more comfortable a lifestyle you will lead. Several types of retirement plans were outlined in this blog post, but if you decide to relocate those funds, here are a few best practices to keep in mind.
Most payments you receive from a retirement plan or IRA can be “rolled over” to a similar account within 60 days. With this approach, you’re still saving for your future and the money continues to grow tax-deferred. If you leave a company, or if your plan is terminated, your 401(k) stays with you; consider rolling the money over into an IRA to avoid paying a 10% withdrawal penalty plus income taxes.
There are three ways to move retirement plan or IRA assets:
1. Direct rollover – In this scenario, you can ask the plan administrator of your retirement plan to directly rollover the money to another retirement plan or IRA. No taxes will be withheld from your rollover amount.
2. Trustee-to-trustee transfer – If you’re moving funds from an IRA, you can arrange for the financial institution to make the payment directly to another IRA. Again, no taxes will be withheld from your transfer amount.
3. 60-day rollover – If you directly receive a distribution from an IRA or a retirement plan, you can deposit all or some of it in a similar account within 60 days. Taxes will be withheld from a retirement plan distribution.
Keep in mind that you can only make one rollover from an IRA to another (or the same) IRA in any 12-month period. This limit does not apply to rollovers from traditional IRAs to Roth IRAs (conversions); trustee-to-trustee transfers to another IRA; IRA-to-plan rollovers; plan-to-IRA rollovers, or plan-to-plan rollovers. Here’s a useful chart that summarizes allowable rollover transactions.
This option is typically not recommended. By withdrawing all available funds from your account you not only get taxed and penalized, but you also lose potential earnings. Plus, you won’t actually have access to all the money in the account, as your employer is required to withhold 20 percent for the IRS. If you don’t put the funds in a qualified retirement account within 60 days, it will be taxed as ordinary income, plus state income tax, if it applies (which it does here in New Jersey). On top of all that, if you are younger than 59½, you’ll incur a 10 percent early withdrawal penalty (more on that below).
There are rules you must follow to capitalize on the full benefits offered by retirement accounts, and, of course, there are penalties if you break them. Here’s a sampling when comes to withdrawing funds from some of the most popular accounts.
Withdrawal rules: No access to your funds before age 59½.
Early Withdrawal Penalties: You can take distributions from employer-sponsored plans prior to age 59½, but the IRS will assess a penalty of 10%, in addition to the income taxes due. There are several exceptions where the IRS will waive the 10% 401(k) early withdrawal penalty.
Tax Rules for Withdrawals: If a distribution is made before you reach age 59½, you may incur 10% additional tax on the distribution. Exceptions do apply.
Withdrawal rules: No required minimum distributions during the owner’s lifetime.
Early Withdrawal Penalties: Withdrawals of your contributions are always penalty-free but there is a 10% federal penalty tax on earnings withdrawals before age 59½ unless an exception applies. Bank penalties and/or fees may apply.
Tax Rules for Withdrawals: Withdrawals of your contributions are tax-free. Withdrawals of earnings are tax-free if you’re age 59½ or older and you’ve held the account for at least five years.
Withdrawal rules: You must begin taking required minimum distributions (RMDs) at age 70½.
Early Withdrawal Penalties: There is a 10% federal penalty tax on withdrawals of deductible contributions or earnings before age 59½ unless an exception applies, such as using IRA funds to pay your medical insurance premium after a job loss. Bank penalties and/or fees may apply.
Tax Rules for Withdrawals: Withdrawals of earnings and deductible contributions are taxed as ordinary income.
As urgent as your financial situation may seem at a given moment, take time to understand your options so you can make the best decision. A good financial advisor can help address your immediate needs while steering you in the right direction.
You can open an IRA at NVE Bank for as little as $10. Our IRA specialist can provide expert advice on what options make the most sense for your retirement needs. For more information, e-mail firstname.lastname@example.org. You can also visit the NVE website, stop by your neighborhood branch, or call 1-866-NVE BANK.