IRA Rollovers
- General information about IRA Rollovers
- Rollover vs. Transfer
- Direct vs. Indirect Rollover
- When might a Direct Transfer/Rollover be a good choice?
- When might an Indirect Rollover or Indirect Transfer be a good choice?
- Rollover Options: When I change jobs or leave my employer, what options do I have for my retirement plan money?
- What are the advantages of rolling over to an IRA?
- Advantages/Disadvantages of leaving assets in old employer plan, or rolling over to new employer plan
- Advantages/Disadvantages of cashing out your plan assets
- How do I open a Pax World Traditional IRA account?
- How do I rollover or transfer from an existing IRA or qualified retirement plan into a Pax World IRA?
Rollover Guide: Download an overview brochure that describes issues regarding retirement account rollovers.
Please note that the information below does not constitute tax advice. State tax regulations may differ from federal tax regulations. Always consult your personal tax advisor before making any tax-related investment decision.
1. General information about IRA Rollovers
Whether you are retiring, changing jobs, or separating from employment for any other reason, leaving a job can be the perfect opportunity to reevaluate your retirement planning. Moving your retirement assets from one investment or account type to another can seem like a daunting task, but it really is quite simple once you understand the options that are available to you.
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2. Rollover vs. Transfer
When you Rollover a retirement account, you are moving it from one type of retirement plan into a different type of plan. For example, you might Rollover from a 401k Plan into a Traditional IRA.
When you Transfer an account, you are keeping your assets in the same type of plan, but you are moving them into a different investment. For example, you might Transfer your Roth IRA from XYZ Fund company into a Roth IRA at Pax World Funds.
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3. Direct vs. Indirect Rollover
Indirect Transfer* or Indirect Rollover: Assets from your retirement plan account are paid to you in the form of a check. You then have up to 60 days to reinvest the money in an IRA or qualified retirement plan.
Direct Transfer or Direct Rollover: Assets move straight from one financial institution to another; you have no access to the money during the procedure.
*Although the term “Indirect Transfer” is technically correct, a transaction in which you take a cash distribution from one IRA and then reinvest the money in another IRA within 60 days is typically referred to as a “Rollover.”
Generally, a Direct Transfer/Rollover is recommended as the most efficient way to move retirement plan assets. However, there are certain situations in which one method or the other, Direct or Indirect, has a clear advantage.
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4. When might a Direct Transfer/Rollover be a good choice?
1. You are moving assets out of an employer-sponsored retirement plan. If you request a check from your employer-sponsored retirement plan (such as a 401k), your employer will have to withhold 20% for Federal income taxes. If you want to rollover the money into an IRA, or transfer it into your new employer’s plan, you will need to come up with the 20% from your savings in order to avoid taxes and early withdrawal penalties.
Example:
401(k) balance: $1,000
Employer withholds 20%: -$200
You receive: $800
- If none of the $1,000 distribution is rolled over into an IRA or other qualified retirement plan within 60 days, you will need to report the $1,000 as taxable income and may be subject to an additional 10% early withdrawal penalty.
- If you rollover only the $800 you received, you will need to report the $200 as taxable income and may be subject to an additional 10% early withdrawal penalty on the $200.
You can avoid the withholding, and the risk of missing the 60-day deadline, by requesting a Direct Rollover or Direct Transfer.
2. You want to move your retirement plan assets more than once in a 1-year period. Because you are never in direct contact with your money during a Direct Rollover or Direct Transfer, the IRS does not limit the number of these transactions. With an Indirect Rollover or Indirect Transfer, you have use of your money for up to 60 days, and the IRS limits those transactions to one per 365-day period.
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5. When might an Indirect Rollover or Indirect Transfer be a good choice?
Your IRA is invested in a Certificate of Deposit that is near its maturity date. A Direct Transfer can take several weeks to be completed. If your IRA CD is very close to maturity, it may be most efficient for you to redeem the CD, and then send the proceeds to your new IRA custodian with a Rollover Certification Form (more on Rollover Certifications below).
You want to use the assets of your retirement plan for 60 days. The IRS does allow you to withdraw money from your retirement account and use it tax-free and penalty-free for up to 60-days, once within a one year period. Keep in mind that if you do not reinvest the money in an IRA or other qualified plan within 60 days, you will need to pay income tax on any amount that is not reinvested and you may owe a 10% premature withdrawal penalty.
Also, you can only make a tax-free indirect rollover involving the same retirement accounts once in any 12-month period. Example: You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.
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6. Rollover Options: When I change jobs or leave my employer, what options do I have for my retirement plan money?
Generally, you have four options for your retirement plan assets when you leave an employer:
- Rollover to an IRA;
- Rollover to your new employer’s retirement plan;
- Leave the assets in the old employer’s retirement plan;
- take the plan assets in cash.
There are advantages and disadvantages to each option, and not all employer-sponsored retirement plans offer all four options. The first step is to talk to the plan administrator or your company’s human resources officer to find out what options are available to you.
For most people, rolling your employer-sponsored retirement plan money into an IRA is an excellent option. An IRA typically offers more flexibility than an employer-sponsored plan, and there are virtually unlimited investment options available for an IRA.
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7. What are the advantages of rolling over to an IRA?
- Maintain the tax-deferred status of your money - you won’t have to pay taxes on your earnings until you withdraw the money, which is usually at retirement when you are likely to be in a lower tax bracket.
- Choice of investments - you have complete control over where your IRA money is invested, and you may have the opportunity to change your investment allocation at any time.
- Accessibility - some penalty-free withdrawal options are available with IRAs, for events such as a first-time home purchase or for certain education expenses.
Beneficiaries/Estate Planning - if you name a young beneficiary on your IRA, that beneficiary would be able to take payouts from the inherited IRA over his or her life expectancy, allowing for further tax deferred growth on the account. Many employer-sponsored retirement plans require non-spouse beneficiaries to take a one-time lump distribution. - Roth Conversion - you cannot convert your assets directly from an employer-sponsored plan into a Roth IRA, but you do have the option of converting to a Roth IRA after rolling over into a traditional IRA (provided your income is $100,000 or less). A Roth Conversion is a taxable event, and you should talk to your tax adviser to determine if the potential long-term tax advantages of converting to a Roth IRA outweigh the short-term tax consequences.
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8. Advantages/Disadvantages of leaving assets in old employer plan, or rolling over to new employer plan
- Disadvantages - Your old employer may not allow you to leave your account in their plan, and your new employer may not accept your old plan assets. Employer plans generally offer a limited selection of investments and typically limit how often you can exchange or change your investments. Employer plans may not allow you to withdraw money for a home purchase or education expenses. Finally, your beneficiaries may have fewer options for distribution under an employer-plan than under an IRA.
- Advantages - Employer plans may allow you to take out a loan against your account (this option is not available on all employer-sponsored retirement plans, and is often not available for former employees who choose to keep their assets in the old employer’s plan). You cannot pledge IRA assets as collateral for a loan. Also, assets held in an employer-sponsored plan are generally protected from creditors; IRA assets may or may not be protected, depending on state law.
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9. Advantages/Disadvantages of cashing out your plan assets
- Disadvantages - Although it may be tempting to use your retirement plan assets for your short-term financial needs, keep in mind that the money in your retirement account can continue to grow tax-deferred. What you choose to do with this money now can have far-reaching effects on your long-term financial well-being. A cash distribution will be taxable and may incur penalties. It is possible that the dollar amount of your plan distribution could push your income up to a higher tax bracket.
- Advantages - for most people, there are few long-term advantages to taking a cash distribution from an employer-sponsored plan prior to retirement. However, if you are over age 59 and a half, or if your retirement account includes employer stock, you may be eligible for some special tax treatments. You would want to talk with your tax adviser to determine if the advantage of any such special circumstances would outweigh the disadvantages of taking a lump sum distribution.
If you decide to cash out your company 401(k) retirement plan, you will be required to pay current income taxes, as well as penalties, on any assets that come out of the plan.
Your current plan is required to withhold 20% of the distribution amount for the IRS immediately. However the final tax due could be considerably higher than 20% depending on your tax bracket.
If you are under the age of 55, you will be required to pay a 10% Federal early withdrawal penalty. You may also be liable for state taxes and penalties too. When all is said an done, you may end up with less than half the assets that you began with.
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10. How do I open a Pax World Traditional IRA account?
- The minimum initial investment per Fund is $250. Please call 800.767.1729 to request a prospectus, which should be read carefully before investing.
- Complete the Pax World Traditional IRA Application. If you are opening an IRA for your spouse, each individual must complete a separate Application. Be sure to sign the Application in Section 6.
- Read carefully the “Terms and Conditions of the IRA Adoption Agreement” in Section 6 of the Application. There is a $12.00 annual custodial maintenance fee for each IRA account.
- Make checks payable to “Pax World Funds.” If you are making contributions for yourself and your spouse, you may include a single check with both Applications.
If you are establishing a SEP IRA, you must include a signed copy of your employer’s Form 5305-SEP or SEP Prototype Adoption Agreement. - Mail the completed Application and check to:
First class Mail:
Pax World Funds
PO Box 9824
Providence, RI 02940-8024Or
Overnight Delivery:
Pax World Funds
C/O PFPC Inc.
101 Sabin St.
Pawtucket, RI 02860-1427
Telephone: 800.372.7827
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11. How do I rollover or transfer from an existing IRA or qualified retirement plan into a Pax World IRA?
If you have not received a check for the account proceeds, you may do a Direct Rollover/Transfer of Assets:
- Follow the general instructions above to establish a Pax World Traditional IRA account.
- Find out if the current custodian, employer or plan administrator requires you to complete any forms.
Complete the Pax World Transfer of Assets/Direct Rollover Form. Be sure to find out if the current custodian, employer or plan administrator requires a signature guarantee on the Transfer of Assets/Direct Rollover Form. - Return the completed Transfer of Assets/Direct Rollover Form to Pax World, along with your completed Pax World Traditional IRA Application and any additional forms that the employer or plan administrator may require.
- Pax World will forward the transfer request to the current custodian or plan administrator, who will then send the money directly to your Pax World IRA Account.
If you have already received a check for the account proceeds, you must complete a Rollover Certification. Please note that if an eligible rollover distribution from a qualified retirement plan is not transferred directly into another qualified plan or an IRA, as described above, a mandatory 20% must be withheld from the distribution. In order to avoid taxes and penalties, you must make up for the 20% withholding from your own savings, and the rollover must be completed within 60 days of receiving the distribution.
- Follow the general instructions above to establish a Pax World Traditional IRA account.
- Complete the Pax World Rollover Certification Form. Note that rollovers must be completed within 60 days after you receive the distribution, and you may make only one tax-free rollover per IRA within a 1-year period.
- Mail the completed Rollover Certification Form, Traditional IRA Application, and a check made payable to Pax World Funds to:
First class Mail:
Pax World Funds
PO Box 9824
Providence, RI 02940-8024Or
Overnight Delivery:
Pax World Funds
C/O PFPC Inc.
101 Sabin St.
Pawtucket, RI 02860-1427
Telephone: 800.372.7827
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