Rollover IRA’s — Pluses and Minuses

Posted by RP
January 23, 2007

Yesterday I mentioned EGTRRA and how it made it possible to pt money from previous employer’s retirement plans into rollover IRAs. I have to admit, until I started researching this article I had no idea just how much IRA’s had changed and expanded. Here’s just a sampling of why you might want to consider an IRA with that EGTRRA money:

  1. Substantial taxes are Avoided: When you transfer the money into a rollover IRA, you avoid all the tax consequences you would incur if you took a cash withdrawal. You don’t have to pay ordinary income taxes on the amount of the distribution, and you don’t have to worry about the 10% tax penalty you would incur if you are under age 59 1/2.
  2. Tax Benefits are Preserved: In a retirement plan the taxes on your earnings are deferred until you take withdrawals in retirement. earnings generally can compound faster when taxes are postponed. When you transfer your retirement money to a rollover IRA, taxes on your earnings will continue to be deferred until you begin withdrawing from your account.
  3. You Gain Access to More investment Options: Retirement plans typically offer a much narrower range of investment options than those you can choose from within an IRA. Many retirement plans, in fact, have no options at all, but in today’s IRA’s the options are nearly unlimited. More on the different plan options soon.
  4. Your retirement Isn’t Put At Risk: This is a very real-world danger you need to guard against. Cashing out a limp sum distribution can be tempting, it may be the largest sum of money you’ve ever been able to get your hands on. But when you use that sum — or the little more than half that will actually be available after taxes — for a current expense, you’re putting your retirement at risk. That amount could grow to a substantial sum that could give you considerable extra income in retirement. Without it you might have to spend your retirement years on a severely reduced budget. Better to consider other ways of coping with current debt … maybe a temporary second job, etc., than to risk your future for the short term benefit.

I certainly hope some of these tips are of value to you, I can guarantee they have been of value to me, just doing the research. The more I learn about financial planning the more I find there is to learn, but its a fascinating subject … and it is both your future and mine.

Disclaimer

As always remember that this site, although written by a retiree with substantial experience in the school of hard knocks, it is for personal, lay opinions and informational purposes only. If you have a legal question you should seek help from a legal professional. If you have questions involving current or future values of pensions you need an actuary or competent pension valuation expert. If your questions are tax-related, seek a competent tax advisor. In other cases, I recommend the base chaplain.

You can comment on this post, you can email me at: davestarr (at) gmail (dot) com or you can call me at: 1-719-423-8872

If you really need an accurate reading on a case involving these issues, I’d suggest you call Bill — 719-475-7529

Related posts:

  1. Rollover IRA’s — Pluses and Minuses
  2. Grab It before It’s Gone
  3. EGTRRA Lets You Put Your Eggs In One Basket
  4. TSP — New Withdrawal and Transfer Considerations
  5. TSP — New Withdrawal and Transfer Considerations

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