Avoiding withholding on rollovers
How can I avoid the 20 percent withholding trap when rolling
over my retirement account into a traditional IRA? I would also appreciate
any help on which bank or financial institution to deposit the money into for
the best returns and least amount of fees and penalties.
Avoiding the withholding trap is easy, just move the money from
your retirement account to the traditional IRA as a "trustee-to-trustee"
or direct transfer. If the retirement plan writes a check in your name it
will be subject to mandatory withholding. Your employer's retirement plan
is required to provide you with a direct transfer option. Here's how that is discussed
in IRS Publication 590, Individual
Before making an eligible rollover
distribution, the administrator of a qualified employer plan must provide you
with a written explanation. It must tell you about all of the following:
|Written explanation to recipients|
right to have the distribution paid tax free, directly to a traditional IRA or
another eligible retirement plan.|
requirement to withhold tax from the distribution if it is not paid directly to
a traditional IRA or another eligible retirement plan. |
tax treatment of any part of the distribution that you roll over to a traditional
IRA or another eligible retirement plan within 60 days after you receive the distribution.
qualified employer plan rules, if they apply, including those for lump-sum distributions,
alternate payees and cash or deferred arrangements. |
the plan receiving the distribution differs from the plan making the distribution
in its restrictions and tax consequences.|
the plan administrator if you have any questions regarding this information.
Boomer Bucks article "Overcoming
rollover fears and anxieties" is recommended reading too.
easy enough to find an account provider that will charge low or no annual fees. While
fees are important, decide how you want to invest the money first and then look
at economical places to hold the account.
for example, offers a no-fee IRA brokerage account with no set-up fees, no annual
fees and no termination fees. An IRA that is a bank account is likely to
have low or no annual fees. Mutual-fund families often waive annual fees
once an account/investment relationship attains a certain dollar value. Don't
let a $30 annual account fee determine where you're going to hold your money.
general, you can chose between a bank account, a brokerage account or an account
held directly with a mutual-fund family. Since most banks now also have brokerage
services in their offices, make sure you know which you're opening if you open
an account with a bank. Asking if the account is FDIC insured is a good litmus
You'll decide between investing in stocks, bonds or
cash -- or some combination of the three. Cash is financial shorthand for money-market
investments. You can invest in individual investments or buy mutual funds that
are professionally managed investment portfolios.
thinking about investing in a brokerage account or with a mutual fund family then
you need to gain some knowledge about investments. My recommendation is for
you to spend some time in the Investing
Classroom at Morningstar.com. It's free and a few basic classes will help
you make much better investment decisions.
Penalties come about
mostly from taking distributions out of your retirement account that aren't qualified
distributions. These early distributions result in you paying a 10 percent
penalty tax. Early distributions of tax-deferred earnings also are treated
as ordinary income and subject to taxation at your ordinary income rates.
If you're not planning to take early distributions, then penalties
shouldn't be an issue. The SmartMoney University IRA
Rules Super Page provides a nice overview of potential penalties and taxation
of early distributions.
Editor's note: Dr. Don has a no-fee
IRA account with Scottrade.
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