With all the job changing that is going on now and corporate downsizing, its important to know what you should do to move your Traditional IRA from your employer into a another IRA or what the potential penalties are if you choose not to take advantage of a rollover IRA.

What is a Rollover IRA?
A rollover IRA is defined as moving money from your employer’s qualified plan, like a 401(k) into an IRA. In such cases you must take physical possession of the assets from your employer’s plan and roll them into a Rollover IRA within 60 days of receipt or incur tax penalties. The benefit of a Rollover IRA is that you will continue to receive tax-deferred status for the Rollover IRA on your retirement savings.

How Do I Create A Rollover IRA?
If you receive the funds directly from your employer, you need only to open an IRA and send the assets within 60 days of receipt. Note: If you have your employer send the assets of the account to you first, your employer will automatically withhold 20% for taxes even if you intend to roll them into an IRA. This is required pursuant to IRS regulations. However, in order to avoid the mandatory 20% withholding requirement, you can authorize a “direct rollover.” A direct rollover occurs when you authorize the assets of your account to be transferred directly to the IRA Custodian. To accomplish a “direct rollover” simply contact your new IRA Custodian and request a Rollover/Transfer form. Upon receipt you will need to complete this form, making sure to indicate it will be a “direct rollover,” and return it to the IRA Custodian. The Custodian will forward the paperwork to your employer for processing. Also, check with your employer to determine if they have any special requirements or have their own form for this purposes which may need to be submitted along with the IRA Custodian’s transfer form.

You should ask your employer how long it would take before they can process your rollover IRA. Normally, it is sent without delay to the retirement account you select.

What Are The Penalties If I Don’t Take Advantage of a Rollover IRA?
If you choose to pull your IRA from the employer and not have your employer create a direct rollover IRA for you, the funds will be subject to a 20% IRS withholding tax.

If you pull any funds from your IRA and you are under 59 1/2, the IRA withdrawal is subject to a 10% penalty.