Close-Up: Rollovers

Physician's Money Digest, June2005, Volume 12, Issue 9

n.

Rollovers: Withdrawing assets from one qualified retirement plan or IRA account and reinvesting them intoanother qualified retirement plan or IRA account within a certain time period, usually 60 days.

As retirement planning goes, there's usually apoint in everyone's lives when they are facedwith a rollover (ie, transferring money fromone IRA to another). For physicians, thiscan occur when moving from one group practice toanother or from one hospital to another. You will thenhave to decide what to do with your plan distribution—either roll it into an IRA or take the assets in a lumpsum, on which you will owe taxes and penalties. Someemployers will offer the option of leaving the retirementplan intact until you retire.

If you choose to roll over your distribution, note thatit can be combined with an existing IRA or placed intoa separate IRA. According to the Web site About.com,if you create a separate IRA for your rollover, you caneasily move these funds to another employer-sponsoredplan in the future. The site suggests keeping yourrollover IRA separate from any other IRAs you mighthave. Once you make contributions to a rollover that isnot from a company-sponsored plan, you lose the rightto move the rollover to a company-sponsored plan.

Time's Valuable Role

In most cases, you are required to contributerollover funds to a replacement plan, either an IRA oranother employer's qualified retirement plan, by the60th day after receiving the distribution. According toTurboTax.com, if you miss the 60-day window, the distributionbecomes taxable in the year in which youreceived it. If the money is contributed to a replacementIRA after the 60-day window, it is treated the same as anew IRA contribution and subject to that year's limit.

You may also choose to do a partial rollover, rollingover only part of the money into your retirement plan.In an example supplied by TurboTax.com, suppose youleft a group practice and had your $8000 in retirementsavings sent directly to you. You might find that youneed $5000 of that money to live on while searching fora new job. However, you were able to roll over theremaining $3000 into your new employer's retirementplan within the 60-day window.

Remember:

In that case, the $3000 becomes your partial rolloverand remains a tax-free transfer of tax-deferred funds.On the other hand, the $5000 you did not roll over istaxable and must be reported on your income taxreturn. In addition, you could be hit with a 10% earlydistribution penalty if you received the money prior toage 59 1/2. An IRA account may not berolled over more than once every 12 months.

After-tax Contributions

As a rule, most contributions to retirement plans arepretax. TurboTax.com reports that you can contributeright up to the plan's limit, deducting that money fromyour income before you pay taxes. These pretax ordeductible contributions can generally be rolled over, ifyou follow the rules carefully.

With some plans and IRAs, you may be able tomake additional contributions that are not taxdeductible, paying taxes on these funds. These contributionsare called after-tax contributions and they may berolled over into another qualified plan or traditionalIRA, unless the rollover is from one qualified plan intoanother qualified plan; in this case, the rollover is permittedonly through a direct rollover. Also, a qualifiedplan can only accept rollovers of after-tax contributionsif that plan provides separate accounting for those contributionsand its earnings.

TurboTax.com suggests that before you considermoving assets from one retirement plan or IRA to another,you think about how you're going to handle the transaction.For example, the site notes that the best way toaccomplish the task is through a direct trustee-to-trusteetransfer of funds—from the plan administrator at yourold job to the one at your new place of employment.

However, if you choose to handle the rollover yourself,make certain to accomplish the task within theallotted 60-day window.

Rollovers from SIMPLE IRAs

Rollovers involving SIMPLE IRA plans generallywork the same way as rollovers from regular IRAs,according to TurboTax.com, provided that therollover occurs within 2 years after a contributionwas first made to the SIMPLE IRA. In addition, duringthis 2-year period, distributions can be rolled overonly to another SIMPLE IRA.

If you choose to move money from a SIMPLE IRAinto a traditional IRA account during this 2-year period,the distribution is not considered tax-free andthe deposit is not considered a rollover. As a result,you will be subject to taxes on the distributionamount, and the contribution you make to the traditionalIRA may be subject to limitations based onyour adjusted gross income.

Following the expiration of the 2-year period,you can roll over or transfer distributions from aSIMPLE IRA to a traditional IRA tax-free, or convertthe SIMPLE IRA to a Roth IRA. If this sounds a littleconfusing, it can be. That's why it's a good idea totalk with your financial planner or accountantbefore making any decisions about IRA rollovers.

Pop Quiz

1) The usual time period for rolling over an IRA is

  1. 30 days
  2. 60 days
  3. 90 days
  4. 6 months

2) Rolling over only a portion of the money in yourretirement plan is called a(n)

  1. Partial rollover
  2. Half rollover
  3. Semi-rollover
  4. Incomplete rollover

3) The number of times an IRA account may be rolledover per year is

  1. Once
  2. Twice
  3. Three times
  4. Unlimited

4) After-tax contributions to your IRA are taxdeductible. True or False?

  1. True
  2. False

5) Early distribution penalties are a result of moneybeing withdrawn from an IRA prior to age

  1. 55
  2. 65
  3. 59 1/2
  4. 70 1/2

Answers: 1) b; 2) a; 3) a; 4) b; 5) c.