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Rollover IRA

A rollover IRA is a traditional IRA account that is created by “rolling over” the assets from an employer sponsored plan such as a 401(k), 403(b), and 457(b).  A rollover IRA is used by retirees and those who have recently changed jobs. 
 
Many people contribute to their employer sponsored retirement plans over the course of their careers.  When you retire or switch jobs you have a choice of what to do with your hard earned money. 
 
Retiring
When you retire you can take a lump sum distribution from your employer sponsored retirement plan.  You will have to pay taxes on this money depending on the type of plan.  If you withdraw the money before age 59 ½ then you will also owe a 10% early withdrawal penalty in addition to the taxes. 
 
Another option is to rollover the assets in your employer sponsored retirement plan to an IRA account.  After you retire you may not need the money in your plan right away, so you can allow it to grow tax deferred until you need it or until you have to take required minimum distributions.  In this case you won’t pay taxes or early withdrawal penalties. 
 
Switching Jobs
If you’re switching jobs you can also take a lump sum distribution, but chances are you’ll be younger than age 59 ½ and you’ll have to pay the extra 10% penalty on top of taxes. 
 
You can also ask your plan administrator to make the payment from your plan directly into another retirement plan at your new place of work. 
If your new place of work doesn’t off a retirement plan or you want more flexibility you can rollover the money into an IRA. 
 
Pros and Cons
An IRA rollover will keep your money growing tax deferred.  When compared to employer sponsored retirement plans, IRAs have many more investment options.  Typically an employer sponsored plan has a choice of mutual funds to select from.  An IRA allows you to invest in any stock, bond or mutual fund offered by your custodian. 
 
However, an IRA’s contribution limits are lower than an employer sponsored plan.  For example the 401(k) plan contribution limit for 2016 is $18,000 and $24,000 for those age 50 and over vs. the IRA contribution limit for 2016 of $5,500 and $6,500 for those age 50 and over.  Also companies will typically match up to a certain percentage of your pay, with an average match of 2.7%. 
 
Lowell Road Asset Management
If you are retiring or switching jobs and have an employee sponsored retirement plan that you want to rollover into an IRA we can help.  Give us a call at 516-767-1099. 
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