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Rollover IRA

The term "rollover" refers to the process of moving retirement savings from a qualified retirement plan to an IRA, commonly referred to as a Rollover IRA, or to another qualified plan.

When you change jobs or retire, you may be eligible to receive a distribution from your employer-sponsored retirement plan. What will you do with your "lump-sum distribution"? Even if the amount seems modest, the money you invested represents important assets you'll need for retirement—assets you'll want to protect and grow.

A rollover gives you the opportunity to continue growing your retirement savings on a tax-deferred basis until you withdraw this money in the future.

There are two types of rollovers to consider:

Option #1: Request a direct rollover into a Rollover IRA, or into another qualified plan.

A Rollover IRA or a direct transfer to your new employer's plan is the easiest way to continue the tax-deferred status of your retirement savings. The reason? By directly rolling over your eligible plan distribution, you can:

Avoid current income taxes and any early withdrawal penalty; and keep your money growing tax deferred.

If you choose a direct rollover:

  • Your distribution will not be subject to federal income tax in the current year.
  • No income tax will be withheld from your distribution.
  • Your distribution will be contributed directly to the Rollover IRA of your choice or, if available, your new employer's qualified plan.
  • Your distribution will be taxed at a later date when you withdraw it from your IRA or from your new employer's plan.

How can you avoid paying unnecessary taxes and penalties?

Consider a Northern Funds Rollover IRA or have your savings transferred directly to your new employer's qualified plan

Direct Rollover Advantages

  • Your money can continue to grow tax-deferred until withdrawn
  • Avoids 20% mandatory withholding tax
  • Avoids 10% early withdrawal penalty

Option #2: Receive the distribution in a check made payable to you.

If you choose to have your retirement plan benefits paid to you, consider the following:

  • Your distribution will be subject to a 20% mandatory withholding tax, which means you will receive only 80% of your retirement savings.
  • Your distribution will be subject to federal income tax in the year received unless you roll it over within 60 days of receiving your check.
  • You can roll over 100% of the distribution eligible for rollover treatment by replacing the 20% that was withheld with money from your other savings. You will receive credit for the 20% withheld when you file your federal income tax return for that year.
  • If you only roll over the 80% of your distribution that you received, the 20% withheld will be considered taxable income and will be subject to current federal income taxes and a possible 10% early withdrawal penalty. Depending on where you live, state and local taxes may apply as well.

How can you avoid paying unnecessary taxes and penalties?

Consider a Northern Funds Rollover IRA or have your money transferred directly to your new employer's qualified plan.


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