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Distributions from Your Retirement Plan

Advantages and Disadvantages of Rollover to a Traditional IRA

Advantages:

  • No current taxes due at distribution if a direct rollover.
  • Assets are invested in a tax-deferred environment.
  • Opportunity to invest the cash that would otherwise go to taxes until ultimate distribution.
  • You may convert the traditional IRA to a Roth IRA (however there are potential taxes due from conversion).

Disadvantages:

  • The tax rate on amounts distributed from the IRA may be higher depending on your tax bracket during distribution years.

IMPORTANT NOTE: The higher tax rate paid on IRA distributions may be fully offset by the tax deferral advantage of the IRA environment.

  • Long-term gains on equity investments inside the IRA (normally taxed at a maximum rate of 15% outside the IRA for many taxpayers) are taxed at ordinary income tax rates (up to 35%) upon distribution.

20% Withholding

If you are receiving a distribution from a retirement account that is eligible to be rolled over and you don't transfer it directly (i.e., a direct rollover to a traditional IRA or other qualified plan), 20% will be withheld to pay for federal income taxes. This is the case even if you eventually roll the funds into a traditional IRA within 60 days of receiving the distribution.

IMPORTANT NOTE: If you don't do a direct rollover, but you do roll over the distribution within 60 days, you won't owe taxes on the amount you roll over. But watch out—you've received only 80% of your distribution (remember 20% was withheld) and thus, you are rolling over only 80%. So you have to come up with the other 20% that was withheld to pay taxes (generally within 60 days) or else, you will be taxed on the 20% you didn't roll over. As long as you roll over the entire retirement distribution, it won't be taxable. You can claim the 20% withholding on your federal income tax return.

SUGGESTION: Elect a direct transfer from your retirement plan to a traditional IRA or other qualified plan to avoid the withholding rule.

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Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA (Opens in a new Window)/SIPC (Opens in a new Window).  UniVest Financial Services is a trade name of UniBank. Infinex and UniBank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of, nor guaranteed or insured by, any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.


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