How to Handle Retirement Rollovers

If you’re like most people, you have to roll over a retirement account at least once. There’s no single solution when it comes to retirement rollover options, but when you know the basic retirement rollover rules, it’s easier to avoid penalties and fees. Here are five tips to help.

Avoiding Penalties and Fees

Handled incorrectly, your retirement rollover options could end up costing you a pretty penny. According to MarketWatch, there are several fees that you can avoid, including:

  • The early withdrawal fee: If you’re younger than age 59 1/2, you’ll be hit with a 10 percent early withdrawal fee if you take the distribution instead of rolling it over.
  • The mandatory 20 percent withholding tax: If you have your company send you a check for the balance of your account, you’ll be hit with a 20 percent mandatory federal income tax withholding. Instead, arrange for a direct rollover into your new retirement account.
  • The fee beyond 60 days: If you’re rolling money over from one individual retirement account (IRA) account to another IRA account, MarketWatch notes that you won’t be charged the mandatory 20 percent withholding tax if the check is made out to you as long as you get that money into the other IRA within 60 days. Same goes for completing direct rollovers: they must be done within 60 days, or you risk the 20 percent tax.

How to Request a Direct Rollover

No one wants the hassle of having to pay a mandatory 20 percent tax if they don’t have to. Completing a direct rollover is often the easiest way to avoid this, according to MarketWatch. To do so:

  1. Contact the brokerage house or bank handling your new retirement account to get the name of a trustee or custodian who will handle the rollover funds.
  2. Get specific instructions on how your current retirement company should write the check.
  3. Notify the administrator of your former employer’s retirement plan that you’re making a direct rollover. Fill out any forms they require.
  4. Make sure the check is deposited in the rollover account within the 60-day period.

Choosing Retirement Rollover Options

Are you more of a hands-off investor or do you prefer being involved in managing the funds? This is an important consideration when you’re choosing a rollover account. If you’re a hands-off kind of investor, consider NerdWallet considers looking for an automated investment management services, which can build you a personalized portfolio and regularly keep things on track based on your preferences. If you prefer being a little more active, look for an online broker that lets you trade low-cost investments.

Traditional vs Roth IRA

Two popular retirement rollover options include traditional and Roth IRAs. However, you choose which one is right? Consider the tax consequences. For traditional IRAs, NerdWallet notes that with a traditional IRA, your contributions are tax deductible in the year you make them, but you do have to pay tax on your withdrawals later. With Roth IRAs, withdrawals aren’t taxed, which is ideal if you expect your tax rate to already be on the high side during retirement.

A Few Rollover Suggestions

NerdWallet offers several suggestions based on your investing style. For hands-off investors, Wealthfront, Betterment and Wealthsimple are among their top choices. If you want to manage your portfolio, they recommend TD Ameritrade for their selection of mutual funds and Merrill Edge for its $0 account minimum, which makes it a good option for low-balance savers.