How to Manage Your IRA

As we enter a new year, you might be considering moving some of your IRA money. One reason might be to consolidate accounts that have fallen in value. Other reasons include switching to a self-directed IRA or Roth IRA, wanting difference investment choices, or the desire to keep each account below the $250,000 limit covered by the FDIC in these times of banking uncertainty. There are a couple of ways to move your money, including the 'rollover'. If you withdraw and redeposit the money within 60 days into another account, it is a 'rollover' and subject to some major pitfalls.

Rollovers to or from an IRA account are only allowed once every 12 months. Break this rule and you will owe income tax on the second withdrawal, plus a 10% penalty if you are under 59 1/2, and the funds will lose their tax deferred status.

You need to be extra careful both by looking back at past transactions and in planning for future needs. Here's why it is tricky - if even $1 in the rollover funds was itself rolled over into the account within the last year, you will be breaking the one-year rule when you move that money. For example, you have $400,000 at Bank A and want to move $150,000 to Bank B. The $400,000 consists of $50,000 in long term funds and $350,000 rolled over from a 401(k). Now suppose that just $500 of the $50,000 was itself rolled over from another IRA account within th last year - the whole $150,000 rollover is taxable with penalty.

If your bank looks like failing, you might want to get your funds out quickly by receiving a check or cash. Again, you need to be careful that none of the money in the account was itself rolled over within the last year or it will be taxed. To add insult to injury, if your balance is over $250,000, you may be limited to withdrawing just the FDIC insured amount. Finally, the bank will withhold 20% of the amount withdrawn towards possible tax liability.

The perferred alternative to a rollover is a direct 'Trustee to Trustee Transfer', in which the money never touches your hands, and there is no once-per-year restriction. This avoids all the pitfalls of the rollover, including the 20% tax withholding.

When you leave your job, you need to consider what to do with the 401(k). A great option is to move the money to an IRA, which typically gives you a much greater choice of investment types. Again, a direct transfer is the preferred method, but some 401(k) plans might insist on issuing a check for your account balance. If so, make sure the check is not made out to you, but to the IRA account you want it deposited into. It then qualifies as a 'Trustee to Trustee' transfer. For example, the check should be made out to "ABC Company as Trustee of IRA of John Doe." By doing this, there is no 20% tax withholding and your 401(k) transfer is not counted as a rollover.

Another reason to move money from a 401(k) to an IRA is to convert it to a Roth IRA. You cannot move 401(k) money directly to a Roth, it has to go into a traditional IRA first and then be 'converted.'

Once the money is in your IRA, check out these tips for how to make best use of it. Or call us at 408-725-7135 with your questions.

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