Rollover IRA Account – How it Works

Rollover IRA typically describes the transfer of funds from a 401k or employer plan to your own IRA account but can also describe moving funds from one IRA to another.  In this blog, we discuss all of these movements and how to do them correctly to avoid taxes and penalties.

Another way to classify rollover IRA accounts is to call them target accounts, meaning that they’re the target for the money that’s being rolled over.  Most people will initiate an IRA rollover when they have a new job or when they’re trying to consolidate several retirement accounts into one large account.  This consolidation makes the management of your retirement savings much easier and is a very common reason to do an IRA rollover.

When you want to roll money into your rollover IRA account (or target account), you begin by contacting the administrator of the rollover account.  In some financial institutions, this administrator is called the manager or trustee, although the actual terminology really doesn’t matter.  Basically, you need to speak to the person who is responsible for the account in order to initiate your IRA rollover.

It’s a good idea to know this person and develop a professional relationship with them.  After all, you have, in effect, put them in charge of watching your money.  By building this relationship, you’ll find it much easier to get your manager to answer any questions you have about how your money is being invested and to help you make changes to your retirement savings strategy as your needs change over the years.

If you’re attempting to consolidate several retirement accounts, you need to be very careful when choosing which kind of retirement account to open.  Some accounts can accept transfers from many different kinds of IRAs, while others can’t.  It would be counterproductive to set up an IRA that can’t receive money from your established accounts, so be sure to do your research before initiating an IRA rollover.

A general rule of thumb to keep in mind is that “like can receive money from like.”  Your best bet when choosing which kind of IRA to set up is to set up the same kind of account as your previous IRAs.  This way, there won’t be any problems rolling money into the rollover IRA account.  Generally, money can move easily from one account to another account of the same type or tax status designation, although some exceptions exist.  Contact your account manager or financial advisor if you have specific concerns about your proposed IRA rollover.

When you decide to roll money into your target IRA, the first person you need to contact is your account manager.  This person will help you to begin the process of getting the funds from your old account into the new one.  Unless there’s a very specific reason not to, you’re going to want to use the direct IRA rollover method.  In a direct IRA rollover, your money is transferred directly between the administrators of two accounts.  This is the simplest way to maintain the tax-deferred status of your investments and avoid any unnecessary taxes or penalties.
By understanding these simple guidelines, you’ll be able to set up and use a rollover IRA to give you greater peace of mind about your investments and greater control over the funds you’re setting aside for retirement.

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