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Rollover IRA

Changing your job or retiring? Consider a rollover IRA

Suppose you are changing jobs or retiring, and you have actively participated in your employer's retirement plan. Your employer may require that you receive a distribution from your plan when you leave.

You now have several key decisions to make about the amount of your retirement savings that were in the plan:

  • You can keep it.
  • You can invest it fully in a rollover IRA.
  • Or you can invest it partially in a rollover IRA.

But because there can be substantial financial ramifications, you need to carefully consider your options.

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Rolling over the distribution: No withholding, no tax and no penalty

If maintaining the entire amount of your distribution is important to you so that you can keep all of it working toward your retirement, you can avoid tax withholding, a possible penalty and possible taxes at this point if you complete a direct rollover into your rollover IRA.

Put simply, a direct rollover means that you do not even touch or see the money — your employer sends it directly to your new IRA.

If you are interested in opening a Roth IRA for your distribution, you must first roll over the distribution to a traditional IRA and then convert it to a Roth IRA.

Taking the distribution directly: Withholding and possible tax and penalty

If you instead decide to have your distribution from your retirement plan paid directly to you, your employer must automatically withhold 20 percent of your money and forward it to the IRS as a prepayment of your income tax due on the distribution.

That's because the distribution is considered part of your income now and the withholding becomes a credit toward current federal income taxes on the entire amount. On top of that, depending on your tax bracket, you may owe additional federal and state income taxes at this point on the payout.

There's more: You may have to pay a 10 percent penalty if you are not age 55 or older in the year you separate from service and receive the distribution. Even if you take the distribution directly, you still have the opportunity to roll it over to an IRA within 60 days and avoid the penalty and taxes.

That's one of the reasons why it makes sense to consult your tax advisor before taking any distribution from your retirement plan.

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To roll over or not to roll over? A look at the numbers

Assume you will receive a $75,000 distribution from your employer's retirement plan. You are under age 55, married filing jointly and in the 25 percent tax bracket. The hypothetical chart on the next page illustrates the possible advantages of an IRA to you:

  Take Distribution With No Rollover Directly Roll Over Entire Amount to IRA
Rollover Amount $0 $75,000
20% Tax Withholding $15,000 $0
Total Current Federal Income Tax Due $18,750 $0
10% Penalty $7,500 $0
Your Cost $26,250 and lost investment opportunity Your money is kept working for you

This example is for illustrative purposes only. Consult with your tax advisor regarding your own tax situation

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Lincoln Investment Can Help

Today, you may no longer rely on just your company pension and Social Security to provide adequate funds for retirement. You should consider developing a retirement investment plan that makes maximum use of available tax benefits, so that your retirement assets will grow more quickly.

Lincoln Investment has specialized since 1968 in providing retirement planning services. A Lincoln Investment financial advisor looks forward to working with you to explore the opportunities offered by a rollover IRA.

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