A rollover IRA can be a class act.
If you're leaving your job and don't know what to do about your 401(k) account, you may want to choose a
rollover IRA. It's the one alternative that's always available if you want to keep your assets and any future earnings tax deferred until you withdraw them from your account. A rollover IRA also offers you the most flexibility in choosing investments. And it gives you the most control over withdrawals when you're ready to start using the money.
To start the rollover process, you fill out an application provided by the financial institution to which you plan to transfer your money to open a rollover IRA. Then you use your IRA account number to complete the rollover request form provided by your old plan administrator. If you have an existing rollover IRA, you can use that rather than opening a new account.
When you turn in the request form, the administrator of your plan liquidates your assets and transfers the
cash value to your rollover IRA, either electronically or by check. If you have a traditional employer plan, you can rollover to a traditional IRA, and if you have money in a Roth 401(k) or Roth 403(b) you can rollover to a Roth IRA.
In addition, you can convert the assets from a traditional 401(k) or 403(b) to a Roth IRA and pay the income tax that's due on the contributions and accumulated earnings. As of January 1, 2010, there's no longer an annual cap on how much you can earn and qualify to roll into a Roth.
IRA CUSTODIANS
The financial institution where you have your rollover IRA is known as the
custodian of your account. As custodian, the institution is responsible for making the investments you authorize, keeping track of the paperwork, and reporting investment performance and account balances to you.
But in most IRAs, the custodian doesn't make investment decisions on your behalf. Nor does it have
fiduciary responsibility for the investments you choose or the way your investments perform. This means if you decide to put all your money into a risky investment, your IRA custodian isn't responsible for advising against it. The same is true if you keep all your money in a low-interest savings account.
In choosing a custodian, though, you'll want to confirm that you'll be able to make the types of investments you plan to make through your account. The alternatives available through an IRA you establish at a bank may be different from those available through an IRA you set up at a brokerage firm. The only investments that aren't permitted in any IRA are coins, artwork, and other collectibles.
Your custodian may charge an annual fee for handling your account — often as little as $10 a year, and rarely more than $50. And if your account balance reaches a certain amount, which the custodian sets, the annual fee may be waived.
ROLLING DOWN THE FEES
Though you might not choose an IRA just to save money on fees, lower administrative costs are often a bonus of rolling over your 401(k). While there are sales charges on certain transactions, such as commissions on stocks you buy or sell, or annual asset-based fees on mutual funds you own, you can shop around for the combination of advice and expense that suits your investing style.
PLAY BY THE RULES
You've got lots of leeway with a rollover IRA, but there are still some rules you have to follow.
Withdrawals before you turn 59 1/2 may result in a 10% penalty in addition to the income tax that is due. You can't borrow against the value of an IRA account, which is often possible with a 401(k). And you can't postpone required withdrawals from a traditional IRA if you're still working when you turn 70 1/2, as you can with an employer sponsored plan.
You should also check with your tax adviser about whether it's a good idea to combine assets from a former employer's plan with an IRA to which you make annual contributions, especially if you think you might ever want to roll the IRA into a new employer's plan. Some custodians may insist you keep those accounts separate.
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