Rollover Basics Start With 'Just Do It'

NEW BERLIN, Ill. ( TheStreet) -- You've heard it millions of times, including on the radio or TV: "When you leave your job, you should roll over your retirement account." You may know it makes sense (or at least you assume it makes sense, otherwise why would these folks admonish you to do so?), but do you know why it's important? And do you have the first clue as to how to accomplish a rollover?

Why roll over?
If you leave an account with a former employer, you are effectively handing over control of your money (and the costs) to the administrator.

Rolling funds over to an IRA ensures that account maintenance is done to benefit you. It also provides flexibility in investment choices.

This administrator's primary job is to ensure that the plan remains as effective and efficient as possible for your former employer. Your interests are not taken into account and, in fact, many activities that the administrator undertakes (and subsequently charges to the plan accounts) are of no benefit to you. By rolling your funds over to an IRA, you can ensure that the costs associated with your account's maintenance are benefiting your own account directly.

In addition, a rollover gives you flexibility in the investment choices you can use. Remember how your employer's qualified plan had only five or six mutual funds to choose from? Now you can invest in any fund, stock, bond or ETF in the market.

How to roll over?
It's actually pretty simple, as long as you follow a couple of important rules. Both are related to maintaining the tax-deferred nature of your investment.

The first rule is that you should have an account set up to receive the monies before requesting the withdrawal from your current plan. If you don't have a place to put the money, the plan administrator will assume you're taking a cash distribution and withhold 20% tax on the withdrawal. The way to resolve this is to ensure that withdrawal paperwork indicates a "direct rollover" is occurring. Your deposit paperwork to a new account will indicate the same.

The second rule is related to the first, but this is one you can foul up even if you've gotten the paperwork filled out correctly: Your rollover must occur within the span of 60 days or you could be penalized as if you withdrew the money to cash out the plan -- 10% if under age 55 -- plus ordinary income tax on the withdrawal.

The current (old) plan administrator may send you a check for your rollover, made out to the new custodian, but it's up to you to make sure you get the check sent to the new plan custodian as soon as possible so there's no danger of taking more than 60 days to complete the rollover.

The entire process is simple enough, following the steps below:

1. Set up a new account.

2. Request a "direct rollover" withdrawal from your old plan.

3. Receive the rollover check.

4. Submit the check with the appropriate rollover deposit slip to your new account.

Note: In many cases, the direct rollover request will be completed without steps 3 and 4, as the account funds may be transferred directly to the new custodian.

As you can see, the process is straightforward, and paying close attention to the simple rules can ensure it goes off without a hitch. Missing the deadline could jeopardize your account's deferred status.

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