When you leave your company, what happens to your retirement assets? Well, that’s up to you. Moving your assets into a rollover IRA can help you keep the same tax benefits, avoid possible penalties and gain more control of your money.
Benefits of rolling into an IRA
Whether retirement is around the corner or many years away, rolling your assets into an IRA offers you a number of benefits, including the ability to:
Keep tax advantages. Rollover IRAs can maintain the same tax benefits for your retirement plan assets. A Traditional IRA gives your money the potential to keep growing tax-deferred. A Roth IRA — like a Roth account in a 401(k) or 403(b) — can provide tax-free growth potential and tax-free withdrawals.
Avoid taxes and penalties. By not cashing out, you won’t have to pay taxes or withdrawal penalties.
Take control of your money. Rollover IRAs generally aren’t subject to as many rules and restrictions as retirement plans. You’ll have more access to your money.
Widen your investment choices. Instead of being limited to the options in your employer’s plan, rollover IRAs allow you to choose from a huge array of investments.
Combine retirement assets. If you still have accounts with previous employers, keeping track of the different rules and paperwork for each plan can be difficult. Use rollover IRAs to consolidate your retirement investments.
Keep contributing. You can make contributions to a rollover IRA. However, income limits may apply for Roth IRAs. The maximum amount is $5,500 for 2016. If you’re 50 or older, you can contribute up to $6,500 for 2016. Of course, you don’t have to roll over money to open an IRA.
Avoid RMDs. You can avoid required minimum distributions during your lifetime with a Roth IRA. With retirement plan accounts and traditional IRAs, you’re generally required to make annual withdrawals once you reach age 70½.
Things to keep in mind
Consider a direct rollover. The money should go directly from your old plan’s trustee to your rollover IRA’s trustee or custodian. Make sure the rollover funds don’t come to you to avoid mandatory income tax withholding.
Are you rolling into a traditional IRA or a Roth IRA? Both types of IRAs give you tax-advantaged growth potential. When you make withdrawals from traditional IRAs, the money is taxable. With Roth IRAs, you already paid taxes on money going in, but qualified withdrawals, including earnings, aren’t taxable.
Money in a Roth 401(k) or 403(b) account can be rolled into a Roth IRA. Non-Roth accounts can be rolled into a traditional IRA or Roth IRA. Rollovers to Roth IRAs from non-Roth accounts are taxable.
Indirect rollovers are subject to withholding. If you request a cash distribution, you can still initiate a rollover. However, 20% of the taxable portion of your distribution is withheld from your distribution for income taxes. You must then roll over the money into an IRA within 60 days of receiving your distribution if you want to keep the tax benefits. If you replace the withholding with your own money — you’ll get the withholding back from the IRS when you file your taxes — you can roll over your entire account value. If you don’t replace the amount withheld, it will be considered a distribution subject to taxes and possible penalties.
Bottom line: Avoid the hassle, and work with your employer to initiate a direct rollover.
Spend it or save it?
Measure the tax implications and penalties of staying tax-deferred and cashing out with the Spend it or save it calculator.
Take the next step
Find out how to start the rollover process to an American Funds IRA or how to initiate another transaction.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing.