Rollover IRAs are generally funded with the assets from an employer-sponsored retirement plan, such as a 401(k) or 403(b). You might decide to roll over to an IRA if you switch jobs, are unemployed unexpectedly, retire, or your company decides to disband its retirement plan. If you decide to roll over and you're part of a traditional 401(k) plan, you roll over to a traditional IRA, and if your plan is a Roth 401(k), you roll over to a Roth IRA.
You have several other options, including leaving your funds in your existing 401(k), if permitted; rolling over assets into a new employer's plan; or cashing out your 401(k). You should consider whether a rollover IRA is the best choice for you.
Direct vs. Indirect IRA Transfers
A direct transfer allows you to roll over funds from an employer plan to the custodian of your IRA.You're responsible for opening the IRA, providing the IRA account number to the person who handles retirement matters for your employer, and authorizing the move.
An indirect rollover lets you handle the transfer yourself by requesting a check from your employer. However, your employer is required to withhold 20% of the balance you're moving as a prepayment of the income taxes that might be due if you fail to complete the rollover on time.
Even though that 20% amount withheld isn't included in the check you receive, you must provide it from another source if you want the full amount of your rollover to remain tax deferred. Furthermore, any amount that isn't deposited within the 60-day limit loses its tax-deferred status for good.
Need More Information? Keep Learning
Considering a Rollover? Start here.
Scottrade does not provide tax or legal advice. This material is for informational purposes only and Scottrade is not responsible for any errors or omissions. The information is subject to change without notice and should not be construed as a recommendation or investment advice. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.
Before making any rollover decisions, investors should research and consider all available retirement options carefully. Your decision should reflect consideration of various factors, including the benefits and penalties involved. Some of these factors include, but are not limited to, investment or account related fees and expenses, differing levels of service available, withdrawal penalties, creditors and legal protections, required minimum distributions, and factors related to owning employer stock. The importance of these factors will vary depending on your individual needs and circumstances. Tax consequences may vary depending on state law and your individual situation. Scottrade does not provide tax advice. Please consult your tax or legal advisor for questions concerning your personal tax or financial situation.