Posts by Joshua Rystedt

What is the Difference Between an Account Rollover and a Transfer?

An important financial planning activity is reviewing your financial plan to ensure that everything is on track to help you meet your financial goals. Life changes, market shifts, and any number of factors can cause plans to change.

One common change that investors make during their financial journeys is to move funds from one retirement account to another. Whether this move occurs for tax purposes, because of a change in employment, or for another reason, it’s important to consider how this change will be made: as a rollover or transfer.

Of course, if your situation involves moving retirement accounts from your former employer, you have a variety of options from which to choose. These include:

  • Leave the money in your former employer’s plan, if permitted
  • Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted
  • Roll over to an IRA
  • Cash out the account value

 

Because of this, it’s important to understand the differences between transfers and rollovers, as well as the benefits and drawbacks of each. Today we’re going to explore these options to help you get a better understanding of how a rollover or transfer could impact your financial planning activities.

What is a Transfer?

A transfer involves transferring funds from one account to another. Generally, transfers move from one account of the same type to another, such as moving funds from a 401(k) plan at a previous employer to a 401(k) plan offered by your current employer.

More commonly, transfers are used to move funds from one IRA to another, since you can move funds between accounts without incurring a tax penalty. However, if you need to move funds from a Traditional IRA to a Roth IRA, you must perform a Roth conversion, and make the necessary adjustments when you file.

 

What is a Rollover?

A rollover occurs when you move funds from one type of account to another, such as from a 401(k) to an IRA, either directly or indirectly. During a direct rollover, funds move straight from Account A to Account B. During an indirect rollover, you take possession of funds for a period of time before putting them into the second account.

There are limits to the way that you conduct rollovers, especially indirect rollovers, and it’s important that you work with a financial professional to help you understand how your funds will move and how to make those moves without incurring tax penalties.

 

How to Choose between a Transfer and a Rollover

Sometimes, the account types or the transfer initiator will determine whether your account transition takes place as a transfer or a rollover. In these instances, your financial advisor or another party will inform you of how the move will operate.

When you have the option to choose between transfer or rollover, it’s important to consider the account types that you’re working with and the potential tax implications of each option. While there may not be direct penalties associated with transfers or rollovers, long-term impacts might make one a more favorable option than the other.

As always, when it comes to challenging financial questions, it’s a good idea to discuss the matter with your financial advisor for a personal recommendation that meets your unique needs. To learn more about financial planning, contact Puckett & Sturgill Financial Group today for a consultation!

 

     

    Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. 

    Ask an Advisor – Nonqualified deferred compensation

    Different parts of the retirement planning equation have different benefits and are better suited to some individuals than others. To understand which parts are more ideal for your planning, it’s important to understand how different plans work.

    Today, we’re going to talk to advisor Paul Sorenson about nonqualified deferred compensation (NQDC) plans. He’ll tell us some of the important items to consider when looking at NQDC plans and how they might fit into an existing retirement plan.

    What are NQDC plans?

    Nonqualified deferred compensation plans (NQDC) are offered by employers to employees to set aside tax-deferred compensation to be paid out at a later date. For employees who maximize contributions to their current employer-sponsored retirement plans like a 401(k) or 403(b) an NQDC represents an opportunity to save more for a future goal or retirement in a tax-deferred manner. Not all employees have the chance to participate in an NQDC plan but if you have the opportunity, it may be worth looking into this benefit a look to see if it might have a place as a part of your financial plan.

    Unlike other qualified employer-sponsored plans, such as a 401(k) or 403 (b), NQDC plans usually allow you to defer receiving a portion of your compensation over and above what is allowed into a qualified plan. When you elect to participate, you choose how much to defer to the plan and your employer then segregates the chosen potion of your salary into a trust which is invested on your behalf. Since the compensation is not paid to the employee currently it is not taxed until some future date when it is actually paid out to the employee. 

    There are many reasons employers offer NQDC plans but among the most common are their ability to help retain and attract talented employees as well as helping high-earning employees save enough of their current compensation to meet future needs. Typically high-earning employees are unable to save enough in a pre-tax 401k or 403b account to meet their retirement goals in full.

    NQDC participation: Some important items to consider

    NQDC plans can vary widely depending on what your employer offers but here are general items to think about:

    1. Do I currently contribute the maximum to my current employer-sponsored qualified plan such as a 403(b) or 401k? If you do not maximize contributions to your qualified accounts, you may want to consider this option first, since these plans are tax-deferred and protected under the Employee Retirement Income Security Act (ERISA).
    2. Do I believe my employer is financially secure? Should your employer fall into bankruptcy, the funds in NQDC plans might be accessible to the organization’s creditors which could mean your deferred compensation might not be paid.
    3. Can I afford to set aside a portion of my compensation knowing that I won’t be able to access it until a date in the future? NQDC plans do not have loan provisions like other employer-sponsored plans, so accessing the compensation which has been set aside is not an option prior to the distribution date that has been set.
    4. How does participation in an NQDC plan fit with the rest of my financial plan? Every NQDC plan is different so it is important to understand the distribution options, investment options, vesting options and service requirements available to you and along with the risks. Once you understand these risks these details the NQDC should become a part of your full financial plan. 

    Every NQDC plan is different and it is important to understand the details and risks of your employer’s plan before choosing to participate. For many, NQDC plans present a possible option to ramp up their savings for the future, but for others investing in accounts outside of their place of employment or combining multiple savings vehicles might be a better option.

    No matter what you decide, working with a financial professional, like a CERTIFIED FINANCIAL PLANNER™ professional, who can help you understand the options and set a strategy to pursue your needs, wants and wishes for today and well into the future is a good place to start.

    If you are trying to understand how an NQDC plan might fit into your financial picture or are just ready to get started with a well thought out financial plan, contact Paul Sorenson at Puckett & Sturgill Financial group today!

      This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. 

      Tax Considerations for the Retiree – Qualified Plan Issues

      Now that you’ve worked through your family and filing issues, as well as your investment income and other issues, it’s time to take a look at the last category for tax time consideration: qualified plan issues.

      Qualified plans often play a large part in the retirees income equation, so it’s essential to properly account for distributions taken throughout the year. Additionally, each account type carries slightly different rules, so you want to stay on top of when you can begin distributions from one account or what your distribution requirements are for another.

      This article is third in a series on Tax Considerations for the Retiree. Read of the series here:

      1. Tax Considerations for the Retiree – Family and Filing Issues
      2. Tax Considerations for the Retiree – Investment Income and Other Issues
      3. Tax Considerations for the Retiree – Qualified Plan Issues

       

      Here are some questions to ask as you approach your qualified plan issues this season.

      Are You Above Age 70 ½:

      • With an Inherited IRA?

        Ensure that your RMD has been met and reported (Form 1040, Lines 4a and 4b).
      • And Have Completed a Qualified Charitable Distribution?

        Double check that this amount if properly accounted for and that the amount is excluded on Form 1040, Line 4b.

       

      Did you Fail to Take the Required Minimum Distribution?

      Your Required Minimum Distribution is the minimum amount of money that you should withdraw from your retirement account(s). If you failed to take the RMD, you will need to pay a penalty, which can be calculated on Form 5329 and carried over to Schedule 4, Line 59.

      Have You Made a Non-Deductible IRA Contribution?

      Look at Form 8606 for more information about your non-deductible IRA contribution. Then, ensure that the cost basis for this contribution is properly tracked.

      Have You Taken a Non-Qualified Distribution from a 529 Account?

      If you took a non-qualified distribution from a 529 account, you’ll need to pay the penalty on the withdrawal amount. File form 5329 to account for the penalty and then carry it over to Schedule 4, Line 59. Your tax professional can provide personalized guidance if you want to understand more about whether your 529 distribution(s) is qualified.

      Did You Withdraw from a Non-Deductible IRA?

      You can use Form 8606 to ensure that the taxable and non-taxable portions of your distribution were calculated correctly.

      Did You Convert Funds from a Traditional IRA to a Roth IRA?

      Conversion of funds from a traditional IRA to Roth IRA can impact your bottom line at tax time. Use Form 8606 to report the converted amount and to ensure that non-deductible IRA contributions were converted and treated as non-taxable. If you made any conversions of this type, you’ll want to enlist your tax professional in assisting you to calculate this properly.

      Have You Rolled Retirement Funds from One Account Type to Another?

      Similarly, if you’ve converted retirement funds from one account type to another (ex. Moving funds from a 401(k) to an IRA), you want to ensure that this is reported and calculated properly. Ensure that funds are treated as a rollover and not as a distribution by double checking that Form 1040, Line 4a displays the rollover amount. Meanwhile, Form 1040, Line 4b should show $0.

      Did You Rollover Retirement Funds and Utilize NUA?

      If yes, you will need to review Form 1040, Lines 4a and 4b to see that your IRA distributions are recorded and to ensure that the basis was taxed.

      These are only some of the considerations that you need to make as you review your 2018 tax return and prepare for the upcoming tax season. To learn more about tax considerations for the retiree, see our posts on family and filings issues, as well as what to do about investment income.

      This article is third in a series on Tax Considerations for the Retiree. Read of the series here:

      1. Tax Considerations for the Retiree – Family and Filing Issues
      2. Tax Considerations for the Retiree – Investment Income and Other Issues
      3. Tax Considerations for the Retiree – Qualified Plan Issues

       

      This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.