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FINANCIAL SERVICES: Play by the (tax) rules

Rollovers are treated and reported separately from regular IRA contributions. That means you can roll over an old retirement account to a new one in the same year you make your regular IRA contributions.

Following a few rules will ensure your money is transferred properly. For example, so-called direct rollovers, when assets move straight into the IRA, aren’t subject to IRS withholding taxes. However, if you liquidate the old account and take the distribution as a check, you’ll generally have 60 days to put the proceeds into a qualified retirement account. Keep in mind that if you don’t do a direct rollover, 20% will be held for taxes, but you can claim that amount back on your taxes at the end of the year. If you miss the deadline, the IRS will classify the liquidation as an early distribution. Your money will lose its tax-free status, and the distribution will be considered fully or partially taxable and could be subject to a 10% penalty. What’s more, any IRA contribution made after 60 days must be reported as regular IRA contribution, not a rollover.

In addition, a rollover only remains tax-free if you invest the same type of asset into the new IRA. What this means is that cash distributions must go into the new account as cash. Similarly, only the same in-kind property can be rolled over.

An in-kind distribution may be your best bet when it comes to moving over and employer stock held in your employer-sponsored account, especially if the stock has appreciated significantly. If you sell the stock before moving it to an IRA, the total sale would be taxed at ordinary income rates. In-kind distributions are made in the form of securities or other property instead of cash. So, you would pay ordinary income tax on the cost basis of the stock and a lower long-term capital gains rate on the amount of net unrealized appreciation if the stock is sold after distribution. Since the long-term capital gains tax rate is lower than most ordinary income tax rates, you should see substantial tax savings.

The world’s your investment oyster

Here’s a summary of the other options available when you leave an employer, change jobs or retire.


Asset allocation does not guarantee a profit nor protect against loss. IRA withdrawals may be subject to income taxes, and prior to age 59 ½ a 10% federal penalty tax may apply. Rolling from a traditional IRA into a Roth IRA may involve additional taxation. When converted to a Roth, the client pays federal income taxes on the converted amount, but no further taxes in the future. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

(Click here to contact Chris Cravens at Coffee Financial.)




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