Retirement Account Rollover

Rolling Over Your Retirement Account Into an IRA and Planning Your Retirement Income

What Is a Retirement Account Rollover?

A retirement account rollover occurs when you move your savings from one retirement account, such as a 401(k) or 403(b), into another qualified retirement account, typically an Individual Retirement Account (IRA). This process often happens when you leave a job, retire, or want to consolidate your retirement savings into one account to simplify management.

Rolling over your retirement account into an IRA provides greater control over your investments and may offer a wider range of investment options. The process can be done without triggering taxes or penalties, provided it’s handled properly.

There are two primary ways to roll over your retirement account into an IRA – Direct and Indirect

Why Roll Over Into an IRA?

  • More Investment Choices: One of the biggest advantages of rolling over your retirement savings into an IRA is the broader range of investment options available. Unlike employer-sponsored plans, which typically offer a limited selection of mutual funds, IRAs give you access to stocks, bonds, ETFs, mutual funds, and other alternative investments. This flexibility allows you to tailor your investment strategy to your risk tolerance and retirement goals.
  • Consolidation and Simplification: If you’ve changed jobs several times, you may have multiple retirement accounts spread across different employers. Rolling them over into an IRA consolidates your savings into one account, making it easier to manage and track your investments.
  • Lower Fees: Employer-sponsored plans, like 401(k)s, may come with administrative fees that can reduce your investment returns over time. By rolling your funds into a low-cost IRA, you may be able to reduce these fees and keep more of your money working for you.
  • Tax-Deferred Growth: When you roll over your retirement account into a traditional IRA, your money continues to grow tax-deferred, just as it did in your 401(k) or 403(b). You won’t owe taxes on the funds until you withdraw them in retirement, allowing your savings to grow faster.
  • Roth Conversion Opportunities: Rolling over into a traditional IRA provides the option to later convert some or all of the funds into a Roth IRA. While you’ll owe taxes on the amount converted, the funds will then grow tax-free, and withdrawals in retirement will be tax-free. This strategy can be especially beneficial if you anticipate being in a higher tax bracket later in life.

Direct Rollover

Direct Rollover: With a direct rollover, your retirement plan administrator transfers the funds directly into your new IRA. This method avoids taxes and penalties since the money never passes through your hands. It’s the most straightforward and recommended option for most individuals.unts. There are several strategies to consider: 

  • The 4% Rule: A common guideline is to withdraw 4% of your retirement savings each year to ensure that your funds last for 30 years. This rule provides a starting point, but you may need to adjust based on your needs, life expectancy, and investment returns.
  • RMDs (Required Minimum Distributions): Once you reach age 73, the IRS requires you to begin taking minimum distributions from traditional IRAs and 401(k)s. These RMDs are based on your account balance and life expectancy, and failure to take them results in a hefty penalty. Planning for RMDs is critical to managing your retirement income.
  • Bucket Strategy: This strategy divides your retirement savings into three “buckets” – one for short-term needs (1-5 years), one for medium-term needs (5-10 years), and one for long-term growth (10+ years). By drawing from the short-term bucket first and allowing the long-term investments to grow, you can better manage market risk and ensure you have a steady income stream.

Indirect Rollover

Indirect Rollover: In this case, your plan administrator sends the funds to you, and you have 60 days to deposit them into an IRA. If you don’t complete the transfer within this timeframe, the distribution becomes taxable, and you may face a 10% early withdrawal penalty if you are under 59½. Additionally, 20% of the funds may be withheld for taxes, which you must replace from other sources when you complete the rollover.

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* Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Estate Planning services are provided working in conjunction with your Estate Planning Attorney, Tax Attorney and/or CPA. Consult them for specific advice on legal and tax matters.