Rollover IRA

Rollover planning
If you are retiring or changing jobs and have assets in one or more employer-sponsored retirement plans, you have some important decisions to make. In general, you have four options to consider for your retirement-plan assets:

1. Open a Rollover IRA. You can instruct your employer to directly transfer your retirement plan assets to a Rollover IRA with a brokerage firm, mutual fund company or bank. A Rollover IRA generally gives you more investment alternatives and flexibility than you currently have with your employer plan. Once you open a Rollover IRA, you can make additional contributions (governed by the rules for Traditional IRAs) and consolidate other retirement plan assets into that single Rollover IRA. Furthermore, with a Rollover IRA your money continues to grow and compound on a tax-deferred basis until you begin taking withdrawals. You may begin making penalty-free withdrawals when you reach age 59 ½ or if you meet certain hardship requirements. You must begin taking withdrawals when you reach age 70 ½.
2. Transfer your funds into your new company's plan. If your new employer allows it, you may transfer your old retirement plan assets into your new plan. You'll keep all your retirement plan assets in one account, and your money will continue to grow and compound on a tax-deferred basis. But, you will be restricted to the investment choices and regulations of you new employer's plan, and you may not have the range of investment options or distribution flexibility a Rollover IRA provides.
3. Stay put. You also may opt to keep your assets in your former employer's plan, as long as the company allows ex-employees to remain in the plan. Your money will continue to grow and compound tax-deferred, but you will not be able to make additional contributions to the plan. Additionally, your assets remained governed by the rules and investment options of your former employer's plan. You will not have the range of investment options or the distribution flexibility offered by a Rollover IRA.
4. Cash out. Withdrawing all your retirement plan assets is rarely a prudent strategy. Keep in mind, your employer must withhold 20% of your cash distribution for income taxes. In addition to owing income taxes on the distribution, you'll owe a 10% early withdrawal penalty if you're under age 59 ½. More important, cashing out means you'll derail your retirement savings plan and forfeit the benefits of tax-deferred growth. If you realize the error of your ways, you will have 60 days from the date of the distribution to reinvest those retirement assets in a Rollover IRA or other tax-advantaged plan. But remember, you must reinvest the entire amount of the distribution, including the 20% your former employer withheld. You will have to wait until you file your next tax return to settle up with the IRS. Remember: Once the 60-day period expires, that money no longer is eligible for a tax-advantaged plan, and you lose the opportunity for future tax-deferred growth.