Do you know where your retirement savings are? Part Two

(Editor’s note: This is the second of two parts. Read the first part.)

Knowing how rollovers work can help you make a decision about whether or not to consolidate.

• IRA-to-IRA rollovers: You can ask your current IRA custodian to send you a check for the amount held in your IRA. You will then have 60 days to deposit the funds into another IRA without incurring any current tax liability. Note that your former IRA custodian will report the amount as a distribution on IRS Tax Form 1099-R; your new IRA custodian will report the rollover contribution on IRS Tax Form 5498. If you miss the 60-day time period, taxes and penalties may apply. IRA-to- IRA rollovers are restricted to one every 365 days per IRA.
• Direct rollover from qualified plan to an IRA: Ask your previous employer(s) about the paperwork needed to complete a direct rollover of your qualified retirement plan assets to your IRA. The assets will be transferred once you complete the paperwork. Note that your former employer’s plan will report the amount as a distribution on IRS Tax Form 1099-R; the IRA custodian will report the rollover contribution on IRS Tax Form 5498.  There are special rules involved in transferring a “pre-tax” retirement plan balance to a Roth IRA—talk with your tax advisor about the impact this may have on you.
• Indirect rollover from qualified plan to an IRA: Like the IRA-to-IRA rollover, you can ask your previous employer(s) to send you a check for your vested plan balance and then redeposit those funds into an IRA or other qualified retirement plan within 60 days. However, the plan trustee will be required to withhold 20 percent of the taxable portion of the distribution as mandatory federal withholding. You will need to make up that 20 percent when you redeposit the funds into an IRA or the amount withheld will be subject to taxes and possibly penalties if you are under age 59½.

Speak with your tax advisor about these and other rules that may apply when consolidating retirement plan assets.

When You Might Not Want to Consolidate.  Notwithstanding the many benefits to consolidating your retirement accounts, there are some caveats to keep in mind. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Thus, once you roll over a qualified plan into an IRA, the ability to take a loan is no longer available.  However, once you leave the company you may not be able to take a loan out anyway, since few qualified plans allow loans to be taken out by former employees.

Another consideration is RMDs. Upon reaching age 70½, owners of a Traditional IRA must begin taking required minimum distributions or face stiff IRS penalties. If the plan permits, qualified plan participants can delay taking required minimum distributions after attaining age 70 ½ if they are still working.

A final consideration may be employer stock. Employer (and former) employer stock held in a qualified retirement plan may be eligible for special tax treatment on distributions (known as “net unrealized appreciation” or “NUA”) that you lose if you roll over the stock to an IRA.  Check with your plan administrator and your tax advisor on whether or not the NUA rules may apply to you.

Generally speaking, simplifying your retirement account structure can help you take control of your financial future.  Your tax and financial advisors will be able to assist you in determining if consolidation makes sense given your specific circumstances and goals.

Don’t wait.  Your actions now can greatly affect your quality of life in retirement, whether it is years away or just around the corner.