Rollover IRAs: One method to consolidate multiple assets

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Your retirement plan assets may be your most important legacy when you move from one job to another. If you change jobs several times throughout your career, as many individuals do, your retirement plan assets could end up scattered among numerous accounts. Consolidating your retirement assets into a Rollover IRA can help you manage these assets carefully and efficiently over the long term.
In addition, you may be able to roll over to an employer-sponsored plan at a new employer (if the new employer's plan accepts rollovers), take a distribution, or leave the account where it is, depending on your unique financial needs and retirement goals. Consider all of your choices and learn if a Rollover IRA may be right for you.Footnote 1

Rollover IRAs vs. employer-sponsored plans

  • Greater control of investments. As the IRA owner, you make the key decisions that affect management and administrative costs, overall level of service, investment direction, and asset allocation.Footnote 2 For example, your IRA can access the investment experience of any available fund complex.
  • Broader exceptions from age 59½ early withdrawal rules. In general, withdrawals from an IRA made before you turn age 59½ are subject to an additional 10% tax, yet there are some exceptions. For IRAs, these include qualified expenses for education, a first-time home purchase and health insurance premiums paid while unemployed.Footnote 3 Special rules apply to each of these exceptions. For more information, consult your legal or tax professional for advice and guidance.
  • More flexibility in estate planning. Generally, IRA assets can be divided among multiple beneficiaries in an estate plan, which facilitates potentially tax-advantaged strategies such as potentially extending tax deferral for 10 years or longer (for designated eligible beneficiaries) following the death of the original account owner.
While there are potential advantages to consolidated IRA rollovers, there are some potential drawbacks.
  • Required minimum distributions (RMDs). You must begin taking distributions from a traditional IRA by April 1 of the year after you reach age 73, and by every December 31 thereafter, whether or not you continue working. Many employer-sponsored retirement plans do not require distributions if you continue working past that age.
  • Costs. Fees and investment expenses may be higher in an IRA than an employer-sponsored retirement plan.

Tax planning for rollovers

Whether setting up a new rollover IRA or adding to an existing one, the distribution may constitute a taxable event, so consider the following carefully.
  • Direct rollovers. Consider instructing the recordkeeper for your former employer's retirement plan to transfer your assets directly to your IRA's custodian. This is because, under federal tax law, a lump-sum distribution that is not transferred directly from one qualified retirement account to another is subject to a mandatory income tax withholding of 20%.
  • Cashing out instead of rolling over. If you spend the lump-sum distribution rather than reinvest it in another tax-qualified retirement account, you'll generally have to pay ordinary income taxes. This is in addition to the 10% early withdrawal tax noted above if you are younger than age 59½ at the time of the distribution and no exception applies. Also, depending on your particular facts and circumstances, the 20% mandatory tax withholding may or may not be sufficient to cover the taxes owed on the distribution.
  • The 60-day rule. Any checks made out to you are subject to a 20% withholding tax — even if you plan to move it to an IRA immediately. In that event, you can get the 20% refunded if you complete the rollover within 60 days. You must deposit the full amount of your distribution in your new IRA, making up the withheld 20% out of other resources, but can request a refund when filing your tax return for that tax year.
  • After-tax contributions. If you have both pre-tax and after-tax contributions in your employer-sponsored retirement plan account, you may opt to roll over the after-tax portion into a Roth IRA without incurring additional taxes. To do this, however, you must also roll over the proportionate pre-tax amounts to a traditional IRA or another employer-sponsored retirement plan.
  • Company stock. Many employers make some or all of their contributions to employee accounts in the form of company stock. If you do not elect a rollover of the portion of your account that is attributable to company stock, you may take delivery of the actual securities rather than their cash value and treat any appreciation upon your subsequent sale of the stock as capital gains rather than ordinary income. (This is called an "in-kind" distribution and should be discussed with your legal and/or tax professional in advance.)
Remember, the laws governing retirement assets and taxation are complex. In addition, many exceptions and limitations may apply to your situation. Therefore, you should obtain qualified professional advice before taking any action.
Keep in mind that fees and investment expenses may be higher in an IRA than your employer-sponsored retirement plan.

You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment (particularly with reference to employer stock), and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information visit our rollover page or call Merrill at 888.637.3343.
Footnote 2 Generally, you would have the ability to direct your investments and asset allocation in your former employer's plan, but you can do so using the menu of investment options that the plan provides.

Footnote 3 If you are age 55 or older at the time of your separation from service, you may have the ability to take a withdrawal from an employer-sponsored retirement plan without incurring the 10% additional tax. That exception is not available for a withdrawal from an IRA.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
The information contained herein is general in nature and is not meant as tax advice. Consult a tax professional as to how this information applies to your situation.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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