Retirement Questions: What Is The Best Way To Handle An Ira Rollover?

Advice on the best way to handle an IRA rollover from a previously existing retirement account.

Many people contribute to employer-sponsored retirement plans through a company 401(k) plan. When you leave that company, you usually have the option of leaving the funds with the company, without the option of making additional contributions, or moving the account to another type of retirement plan, the IRA (Individual Retirement Account). Although it may be tempting to cash out the 410(k) money, you will lose 10% of the account value to federal taxes and another 10% to an early withdrawal penalty. If you have the option of moving your existing account to your new employer's 401(l) plan, this is the best option, since you will incur fewer management fees by having a single account. If this is not an option, your best bet is to move your existing retirement account into an IRA. When you move or "roll over" your account, there are a few things to keep in mind to best handle the rollover of your IRA.

The most important choice is what type of IRA you should roll your account over into. While you can roll over your old account into a new IRA of any type, you will want to choose the IRA based on whether you plan to make additional contributions, and the tax implications of contributing to, and removing money from, each type of IRA. The two types are traditional and Roth IRAs. Each has its own advantages and disadvantages, especially in terms of the tax advantages. Both IRAs have an annual contribution limit of $3000 (although the amount of money you can roll over into an IRA from a qualifying retirement account is limited only by the amount of money in the originating account and does not affect your ability to add more money to the account that year). When you contribute money to a traditional IRA, your contributions are tax deductible depending on your income limit requirements, tax filing status (married vs. single) and your ability to participate in employer-sponsored retirement plans. Check with the IRS or your accountant to see if you are eligible for tax deductions with this type of IRA contribution. The other option is the Roth IRA, in which the contributions are not tax deductible but the future withdrawals from this account are tax-free. The Roth IRA is also more flexible in your ability to withdraw funds for other expenses, such as a first-time home purchase, college expenses and medical expenses. However, you can contribute the full $3000 to a Roth IRA only if your annual adjusted gross income is less than $95,000 for single filers and $150,000 for joint filers. If your income exceeds these limits, you can still put the money into a traditional account, but you will not be able to take a tax deduction for your contributions.

Once you have chosen the type of account to roll over your account into, the next step is to decide where to put your money. Most brokerage and mutual fund companies offer IRA accounts for many of their funds. Check out the fees for each account; some companies will waive or reduce broker fees for IRA accounts. Once you have chosen an account to move your money to, simply call the brokerage firm or go to their website to download the IRA rollover form, which is typically a straight-forward form. For the best results, choose a diversified fund rather than several different types of funds, to keep the fees low while maximizing the return on your account.

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