How to save for retirement using IRAs?
Bill Gerhard: Hi! I am Bill Gerhard, Director of Financial Services for AAA. I'm discussing in this video series, how to save for retirement using IRAs. I want to share a quick review on how to roll over your IRA and what does rollover mean?
A rollover is a way to transfer money moving it from one IRA to another without incurring taxes and penalties. To avoid taxes and penalties, you must move this money into another IRA account within 60 days of withdrawal. If you don't, that transaction is penalized and taxed.
If you are under the age of 59-and-a-half and do not meet the 60-day rule, the IRS will consider this a full distribution and you will be assessed a 10% penalty. The whole distribution will be added to your gross income.
For a Roth IRA, only the earnings will be added in, unless your Roth IRA has been opened for less than required five years. You can only roll over IRA money once in a 12-month period per custodian.
For example, if you have IRAs at different banks, you can roll over annually per bank. This one year period begins on the date you receive the IRA distribution, not on the date when you roll it over into another IRA. This one-year rule does not apply to pension distributions.
You can make direct or indirect transfers many times during the year. The provider you are sending the IRA to should be able to help you. If you're leaving an employer or retiring and you need or want to move your 401k retirement proceeds, your easiest option is to have your company's administrator write a check to the new IRA rollover account directly. No taxes will be withheld or penalties incurred.
If the check is made out to you, your employer must withhold 20% of the total amount. You have to apply to get the 20% back at tax time after depositing the funds into the new rollover account. Most IRA providers such as banks and brokerages will help you handle the paperwork.
Before you take an early withdrawal from your IRA, be sure to understand the consequences. Depending on your income and tax status, the added taxes and penalties could be higher than the cost of borrowing the needed money at current interest rates. Rating your IRA may mean taking money you won't have the opportunity to replace in retirement.
Moving your IRA doesn't have to be a hassle if you explore your options and seek some sound of financial advice. A rollover or transfer can even be a great opportunity to improve on your investments and add diversity to your portfolio with a greater range of stocks, bonds, CDs and mutual funds.
AAA offers the information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing.
Next step, we'll review compound interest and the Rule of 72.