What is a Rollover IRA?
What is a Rollover IRA?
You’ve probably heard stories about how great the economy and the job market used to be “back in the day”. Pension plans were the norm, and people tended to work for one company for most of their working life.
However, those days are long gone. In today’s world, decent pension plans are extremely rare. Not only that, but it is expected that workers will job hop between many employers over the span of their career.
There is Social Security, of course, but will you receive enough to be able to live on? With Social Security there is always the risk of the government cutting back on benefits, or increasing the retirement age. And all this is assuming Social Security will still exist by the time you retire.
In order to have any peace of mind you must fend for yourself. Taking your retirement into your own hands is the best way to secure your future.
Thankfully, there are many additional retirement plan options available today, such as an Individual Retirement Account. Retirement plans are a great way to add extra padding to your retirement funds, and give you the peace of mind that your future is secure.
Unfortunately, job hopping complicates your retirement planning because each employer has their own plan. With the prevalence of job hopping today, you can expect your retirement planning to get messy rather quickly.
So, are you doomed to having many small retirement accounts to keep track of, or is there a better way to do things?
Fortunately, there is a solution to that problem, and the answer is a Rollover IRA.
Rollover IRA Simple Definition
A Rollover IRA is a special retirement account used to transfer assets from an old plan into a new plan. This is especially useful for those who change jobs frequently. Additionally, tax free rollovers are permitted at any age.
The benefit of a Rollover IRA is that you are able to move your assets between retirement plans while keeping the tax benefits of those assets.
There are some rules as to what existing accounts can be rolled over to, but the most common ones such as Roth IRA, Traditional IRA, and 401k are all eligible.
How Does an IRA Rollover Work
There are two methods of using a Rollover IRA. The first is the direct rollover, and the other is the indirect rollover.
In a direct rollover, your plan administrator pays the funds directly to your new retirement account. The benefit of this method is that it keeps things simple and there is little risk of complications or incurring penalties.
There is also the option of using the indirect rollover. With this method, the funds are paid to you, and you must deposit them into your new account. The funds must be transferred to the new account within 60 days, or else the money will be treated as ordinary income by the IRS and you will have to pay taxes on them.
For most people, a direct rollover is recommended as it minimizes the risk of mistakes.
Typical Indirect Rollover IRA Mistakes
While IRA rollovers are convenient, they come with their own set of rules just like any other retirement account. Make sure to follow these rules in order to avoid paying any unnecessary penalties and fees.
- 60 day rule
There is a 60 day window to place your funds into your new account from your old account. If the 60 days is exceeded then the IRS will treat the funds as ordinary income and will tax them accordingly.
Sometimes there are circumstances that are out of your control that prevent you from abiding by this rule. If this is the case, there are exceptions such as the waiver for hardship that can protect you.
For example, you may receive a waiver as a result of hospitalization, disability, or an error on the part of the financial institution.
- One year waiting rule
According to the one year waiting rule, you can only make one tax free rollover per year. This rule does not apply to roth conversions.
- Same property rule
The same property rule dictates that the rollover must consist of the same property as you had in your previous account. In other words, you can’t use the funds to purchase different assets than you already had. If different assets were purchased, the IRS would treat the funds as ordinary income and they would be subject to tax. Unless the party involved is over 59.5 years of age.
- When not to Rollover
Rollovers are for when you want to transfer the funds themselves. If you simply want to switch your account to a different financial institution there is no need to do a rollover.
Instead, you are eligible to use the transfer method. A transfer does not have to be reported and has no restrictions on how many times it can be used per year.
Benefits of a Direct Rollover IRA
Transitioning a retirement plan with a Direct Rollover IRA, allows you to maintain the tax deferred status of that retirement account. One huge benefit is that a Rollover IRA will enable you to combine all of your ex-employer’s retirement accounts (such as 401k’s) into one single IRA. This makes managing your account(s) much simpler.
Another advantage of a Direct Rollover IRA beyond consolidation of multiple accounts across multiple ex-employers, is more investment options — you have more control. As mentioned previously, with the Indirect Rollover IRA, you are subject to the ‘same property rule’, which limits you to the same investment options that your ex-employer allowed. Your ex-employer’s plan might have had between 10-20 mutual funds to choose from. With a Direct IRA rollover, you will have more investment options such as gold, silver and other precious metals. Best of all, you will maintain the tax-deferred status of your retirement money. This is a great IRS loophole to take advantage of!
How to Set Up a Gold IRA Rollover
Given the current economic trends, you may be interested in investing in gold as part of your retirement plan.
Gold has been valuable since ancient times, and there is no indication of this ever changing. Due to its scarcity and usefulness in many fields, gold will always be a valuable asset. Not only that, but gold is also one of the few assets that retains its value during a financial crisis.
If you want to diversify your portfolio and protect yourself against inflation and other financial problems, then gold might be your best bet.
Typically, many retirement plans don’t allow you to own physical gold because it requires additional responsibilities such as storage and insurance.
Fortunately, there is a great option available to you if you wish to diversify into physical gold. It’s called a Gold IRA, and are able to be funded by a rollover from most retirement plans.
Gold IRAs make it easy to buy gold. All you have to do is open your account, transfer your funds, and then choose the coins and bars you want. An expert adviser will help you file the paperwork and help you with any questions you may have. Click here to read the review of our top rated Gold IRA company.