You’ve been saving for retirement for several years and built a relationship with a custodian of the traditional IRA (Individual Retirement Account). However, this year, you’ve decided for one reason or another that you want to move your retirement to a new custodian. Perhaps, it was for a job change that required you to relocate. Or, perhaps, you decided that you just wanted to build an investment retirement with someone new. There are few things to know about retirement rollovers and distributions.
1. You can only have one rollover traditional IRA per year
There is an exception. Perhaps, your custodian is going out of business or your investment is shutting down or no longer being offered. Other than this exception, you can only rollover one IRA per year. Rollover more than one IRA will result in a distribution for those rollovers more than one resulting in taxes and possible penalties if you are under the age of 59 ½
2. You can not borrow from IRA
Unlike some employer 401ks, you can not borrow from your traditional IRA. Borrowing from an traditional IRA will result in termination of your traditional IRA account and results in taxes and possible early distribution penalties if you are under the age of 59 ½.
3. When you borrow from your 401k and you leave your job, the loan to your 401k must be paid back within a short period of time (60 to 90 days). Otherwise, the loan will be considered a distribution that results in taxes and possible early distribution penalties if you are under the age of 59 ½. The 401k has to be paid back within five years (5).
4. You have sixty (60) days to rollover a cash distribution
If you receive a check distribution from your traditional IRA, you have sixty to transfer that money back into your traditional IRA account or deposit it with a new custodian. Otherwise, the distribution will result in taxes and possible early distribution penalties if you are under the age of 59 ½.
If you have a death or a serious illness that resulted in you not being able to roll your distribution within the 60 day window, you can request a waiver on the 60 day rule. The IRS may or may not grant your request.
Most IRA holders do a direct rollover to the new custodian instead of receive a cash (check) distribution.
5. You can convert a traditional IRA into a Roth IRA
When you convert a traditional IRA into a Roth, you are moving pre-taxed money from the IRA into an after tax Roth IRA which results in taxes on the traditional IRA distribution when you convert it to a Roth IRA.
6. Traditional IRA required minimum distributions (RMD) begin at age 70 ½. Not taking the required minimum distribution at age 70 ½ will result in a 50% penalty of the required minimum distribution that you were suppose to take. For example, if your RMD was $50,000 that you didn’t take, then the penalty would be $25,000.
Roth IRAs do not require a required minimum distribution until after the owner dies.
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