When you transfer a retirement account, be sure to follow the proper rollover rules. If you don't handle your rollover correctly, you could get slammed with taxes and the early withdrawal penalty on your savings. By understanding the difference between a pre-tax and an after-tax account rollover, you should avoid any tax problems and be in the clear for continuing your retirement plan.
Before you can start your rollover, you need to figure out what type of retirement account you are transferring. There are pre-tax and after-tax plans. Pre-tax accounts are funded with money that has not yet been taxed. Common pre-tax accounts are pensions, 401(k)s and the traditional Individual Retirement Account. You fund after-tax accounts with money that has already been taxed. The two after-tax accounts are the Roth IRA and the Roth 401(k). While the big pile of available retirement plans can be confusing just remember: unless you're account mentions it's a Roth, it's a pre-tax account.
Pre-Tax to Pre-Tax
The easiest transfer for a pre-tax retirement plan is a rollover into another pre-tax plan. This is usually a transfer into another company's 401(k) or into a traditional IRA. Since you are keeping the tax type the same, you won't owe any tax on this rollover. To complete this rollover, open your new account and ask your old plan administrator to directly transfer over your funds. The plan administrator may transfer the money into your bank account instead. In this case, make sure to hustle on moving your money into your new retirement plan. If you don't complete your rollover in 60 days, it will be counted as a withdrawal and you'll need to pay taxes -- and possibly a penalty -- on your entire balance.
Pre-Tax to After-Tax
You can also roll over your pre-tax account into an after-tax account. This can be a good idea if you think your investments will soon explode in value or that you'll be making big during retirement and move into a higher tax bracket. For this rollover, you'll need to pay tax on your entire retirement account balance so it becomes after-tax money. However, you won't owe the 10 percent withdrawal penalty as you're moving into another retirement account. While this type of rollover is less common, it can be a big long-term tax saver in the right situation.
After-Tax to After-Tax
Rollovers are a one-way street. You can convert a pre-tax account into an after-tax account but you can't go the other way. If you want to roll over an after-tax account, you can only move it into another after-tax retirement account. This process is the same as a pre-tax to pre-tax rollover. Set up your new account, call up your old plan administrator, and make sure to complete your transfer within 60 days. Your transfer should be painless and tax headache free.
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