For most Americans preparing for retirement, much of their
funds are stored in a company-sponsored retirement plan. Employees of the gas, oil, and chemical industry are no exception. However, there will almost certainly come a
time when these savings have to move, either due to a change or end in
employment. In these instances, you’ll have to perform a rollover and transfer
the funds within that account to another.
The typical account rollover sees funds from a retirement
account, like 401k or 403b, moved into an Individual Retirement Account (IRA).
Rollovers into new 401k or 403b accounts are also common for employees moving
from one company to another. For retirees, however, the move to an IRA will be
most relevant to them.
Understanding how rollovers work and how to execute them
properly is important when preparing for and transitioning into retirement.
There are deadlines and tax implications that you should be aware of, so that
you can make the most prudent choices with your retirement funds. Keep reading
as we go over a few must-know aspects of the retirement account rollover.
When to Move
As previously mentioned, an account rollover may be
necessary when an employee moves to another company or when they leave their
job, including when they retire. Typically, moves from company to company will
see the employee simply rolling their account over to another similar account –
one company’s 401k to another’s 401k, for instance.
For individuals leaving a company to retire, they will also
have to leave their company retirement plan and move to an individual account,
either an IRA or a Roth IRA. Some companies may allow former employees to
remain on their company plan, but these are exceptions. Check with your
employer about their retirement policy, or speak with a retirement specialist
to get a clearer idea of your options.
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IRA vs. Roth IRA
Often, retirees will wonder whether they should convert
their funds into a traditional IRA or a Roth IRA. A Roth IRA serves the same
purpose as its traditional counterpart, the only difference being that the
funds within a Roth are taxed on deposit, while traditional IRAs are taxed upon
withdrawal.
Some companies may offer a Roth 401k or Roth 403b plan to
their current employees. Because these too share the same tax implications as a
Roth IRA, the funds here can be easily rolled over to a Roth IRA without any
new taxation. However, if you have been taking advantage of a traditional
retirement plan and now want to rollover to a Roth IRA, you’d need to pay taxes
at the current income tax rate for all of those funds.
In the wake of the 2017 tax overhaul, individual income tax
rates are at a temporary low. Because of this, a Roth conversion may be an
attractive prospect for soon-to-be retirees. However, these choices can’t be
undone, so talk with your advisor and weigh your options before making your
move.
Rollover Right
When you do choose to execute an account rollover, you’ll
have to declare it. Doing so will give you a 60-day window to withdraw the
funds from one account and move them to another without tax ramifications
(unless there is a Roth conversion). If you miss this 60-day window, however,
the funds you withdrew will be considered income and will be taxed accordingly,
so make sure you meet that deadline.
A common mistake people make when withdrawing retirement
funds for a rollover is that they do so in their own name. Because of account
regulations, doing this will cause you to suffer a 20 percent tax hit, which
you’ll have to supplement out-of-pocket when you redeposit. Instead, have your
bank make out the check to the custodian of your new account. Doing so will
ensure you don’t suffer any avoidable taxation.
Lastly, individuals doing a rollover must report the action
to the IRS, even if they’re not being taxed on it. This is done through two
forms: an IRS form 1099R, which says that you’ve withdrawn from your previous
plan, and an IRS form 5498, which states that you executed a rollover.
Make Smart Retirement
Choices
Your retirement accounts are just one of many things to
think about when preparing to exit the workforce. This is milestone moment in
your professional life, and it’s full of choices — many of which can only be
made once. Make sure you do what is best for you. Whether you’re considering an
account rollover or a health insurance policy, the Baird team is ready to help
gas, oil and chemical professionals retire with confidence. We can also work
with other professionals to help address tax & legal concerns.