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Rolling over a distribution from your employer-sponsored retirement plan account to a traditional individual retirement account (IRA) isn't difficult. Still, it's easy to make a mistake that could cost you a chunk of your savings. Here are a few rollover "missteps" to avoid.
A Check Instead of a Transfer
You could handle the rollover yourself. But, if the check is made out to you, you'll generally receive only 80% of the money in your plan account. The other 20% will be withheld to pay income taxes. You'll need to come up with the missing funds to complete the transaction.
Instead, request a trustee-to-trustee transfer from your retirement account to an IRA set up to receive the funds. Funds won't be withheld to pay taxes, so your entire account balance will go into the IRA.
Including After-tax Contributions in the Rollover
Have you made both pretax and after-tax contributions to your plan account? If you roll all the funds into an IRA, you won't be able to take out just your after-tax contributions. Only a portion of each IRA withdrawal will be treated as a nontaxable return of those contributions.
Think about withdrawing after-tax dollars from your account before you roll it over to an IRA. The withdrawal will be tax free, and you'll be able to use the funds however you wish.
Rolling Over Company Stock into an IRA
Are you holding highly appreciated employer stock in your plan account? If you roll the stock into an IRA, you'll avoid paying taxes right away, but you could be hit with a large tax bill when you eventually take withdrawals from your IRA. IRA withdrawals don't qualify for the lower capital gains rates.
It might be better to take the shares and roll over the rest of your funds. You'll pay income tax, but only on the stock's cost (generally, its value when added to your account). Then, if you later sell your shares for more than the cost amount, you'll owe capital gains tax on the difference.
Discuss your rollover options with your professional advisors before going ahead with a rollover.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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