Rollover an IRA Without Paying Taxes
Taxes generally won’t apply when rolling over an IRA account directly; that means having your former employer send a check directly from their retirement account into your chosen IRA provider’s account.
Your new IRA must be funded within 60 days or you’ll face tax consequences; though there are exceptions.
Taxes
IRAs typically offer lower fees than employer-sponsored retirement plans and often feature more robust investments options. Before moving money into one, however, it’s essential that you understand how taxes and penalties affect a rollover; SmartAsset’s free tool connects you with pre-vetted financial advisors in your area who can help minimize such taxes and penalties; schedule a call with one of your matches so they can discuss your unique situation and goals further.
Ideal, direct rollovers allow for a seamless transfer from old account to new, without any taxes being withheld, unlike indirect rollsovers which necessitate returns within 60 days; failing that, income taxes must be withheld from distribution amounts as per IRS regulations; savers aged under 59 1/2 may incur an early withdrawal penalty of 10% – both these scenarios can be avoided through direct transfers.
Fees
When rolling over your IRA, you have two options for moving the funds: direct or indirect transfers. Direct transfers don’t incur taxes or fees while indirect rollovers may require more complicated steps such as your old employer sending you a check that needs to be deposited within 60 days, otherwise the IRS will treat the distribution as early withdrawal and tax it accordingly.
Though fees associated with an IRA might seem small at first, they add up over time and could help you save thousands over your lifetime by choosing one with lower fees. Furthermore, IRAs tend to offer more investment choices than 401ks do; including stocks, mutual funds, cash certificates of deposit bonds and more which help diversify your portfolio better while meeting retirement goals.
60-Day Deadline
No matter if you are moving money between IRAs or rolling over retirement plan distributions into an IRA, the IRS allows 60 days from the original deposit date for you to redeposit them and avoid taxes and penalties. Otherwise, they’ll be recorded as taxable income and tax paid, and an early withdrawal penalty of 10% could apply if you’re under age 59.5.
An effective way to meet a 60-day deadline is with direct rollover, wherein your old account’s holder transfers funds directly into your new IRA without delay or error. This method reduces delays and mistakes.
If you don’t meet the qualifications to request an exception to the 60-day rule, submit a self-certification letter detailing why you missed your deadline – the IRS offers a model letter you can use as reference.
Requirements
When rolling over an IRA, any distribution must be deposited within 60 days or it becomes taxable as ordinary income and could incur an additional 10% penalty tax.
For maximum safety when rolling over an IRA, direct transfers from one custodian to the next are the safest method. Also referred to as trustee-to-trustee transfers or in-kind rollovers, direct transfers don’t involve checks and often result in less chance for mistakes than checks do.
Direct rollovers can only take place if funds from your previous employer plan are sent directly into your new IRA account. Otherwise, your firm may send a check withheld 20% and require you to add this sum back when depositing into an IRA in order to avoid taxes and penalties.
Keep tabs on both your paperwork and online accounts to make sure the correct number of days have passed. A Voya financial professional can assist with understanding all your options and ensure your rollover occurs efficiently.
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