Yet direct contributions have accounted for a declining percentage of the total amount of money flowing into IRAs. In 1996, 11% of IRA inflows was due to direct contributions; by 2007, direct contributions were responsible for only about 4% of new money in IRAs.2
If workers are contributing only $14 billion of the more than $300 billion going into individual retirement accounts, where’s the rest of the money coming from?
Meet the Rollover
An alternative method for investing in an IRA is through an IRA rollover, which can be used to transfer assets from a former employer’s retirement plan or another IRA.
When you leave an employer for another job or for retirement, it might be tempting just to withdraw your retirement plan assets, but doing so could be one of the costliest mistakes you ever made. Every dollar you withdraw is subject to ordinary income taxes; and if the sum is substantial, the extra income could force you into a higher tax bracket. Plus, if you are younger than age 55, your withdrawal may be subject to a 10% federal income tax penalty (with certain exceptions).
By contrast, a properly executed IRA rollover may help preserve the tax-deferred status of your retirement funds. Not only will you avoid a 10% tax penalty, but once you begin withdrawals in retirement, you can spread your tax liability over multiple years.
There are a number of reasons why you may want to transfer your money out of a former employer’s plan, but they all come down to greater control over your money.
* Employer plans are an expense to the employer, who may not be interested in providing benefits to former employees. When you roll your money into an IRA, the custodian is directly accountable to you, not your former boss.
* IRAs tend to offer greater investment flexibility. Employer plans typically have a limited number of investment choices and often don’t offer the opportunity to purchase individual securities (such as stocks and bonds). An IRA can be directed to purchase just about any qualifying investment.
* If you have multiple retirement accounts, including multiple IRAs, you may run the risk of losing track of your money. When you consolidate the assets into a single IRA, it may be easier to make adjustments, reallocate, rebalance, or simply maintain a clear picture of your financial situation.
The critical element in any rollover is doing it correctly, which means you may need professional help. Otherwise, you could incur unexpected taxes and penalties. Contact us at 630-548-9600 for assistance with your Naperville IRA options.
1–2) Investment Company Institute, 2010
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.
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