What is a Trustee to Trustee Transfer?

If you leave your job and your retirement plan is distributed through the employer, what can you do to keep the funds active without paying an early distribution penalty to keep your money? This is where a trustee to trustee transfer can become beneficial. This happens when the movement of retirement funds that are in different types of plans are rolled over or consolidated into a single plan from one financial institution to another.

Let’s say that you have an employer-sponsored 401k at your job, but you’ve accepted a new position with a different employer that doesn’t offer a retirement benefit. Once you leave the employer, you’ll want to take control of your funds with you, right? If you took that 401k and rolled it over into a self-directed 401k at a different account holder, then this would be considered a trustee-to-trustee transfer.

If you performed an IRA rollover from the 401k to a traditional IRA, it would also be considered a trustee-to-trustee transfer if the account holder of the retirement plan became different. It is not a reference to who is directing the IRA’s investments, the beneficiary if it should change because of tragic circumstances, or a change in investments.

What Do You Need to Know About IRA Rollovers?

If you’ve left your employer and you cashed out your retirement plan, then there is a good chance that 1/5 of the funds from that plan will be withheld to cover any tax responsibilities and penalties that you may need to pay. If you take those funds and roll them over into an IRA within 60 days of cashing out the retirement plan, then you can recovered the withheld amount.

You are responsible for depositing the 20% that was withheld into the rollover IRA in order to release the full amount of funds that was withheld upon distribution.

If you cannot or will not make up the 20% difference in funding from the cash out as you start the rollover IRA, then the IRS considers the action a distribution and this may subject you to additional taxes as it will be treated as income. You will need to consult with a tax advisor you trust in this situation to consider what your tax liabilities would be.

You can avoid all of this if you just perform a direct rollover, even if it is one that is trustee-to-trustee.

How Can a Direct Rollover Be Achieved?

If you are leaving your employer and you want to take your retirement funds with you without paying a penalty, then you will want to perform a direct rollover. It’s the easiest option to keep the money in your control and you can roll the money into your IRA directly from the employer plan. You’ve got several options to consider that can help you avoid penalties.

  • You could consolidate your employer plan into a current IRA that you already control.
  • You could place your employer 401k and your current IRA into a new IRA that includes both funds.
  • You might be able to transfer your funds to the retirement plan of your next employer, even if you plan to be self-employed.
  • You don’t have to transfer your assets at all and just leave them where they are.

The only issue in leaving the retirement funds alone is that you still need to stay active with the plan in order to keep it investing. Plans that have inactivity can have the cash dumped into a money market plan that won’t grow any money right now. Over time, with maintenance fees, those retirement balances could hit zero on you.

Why Choose To Rollover Into an IRA?

A trustee-to-trustee transfer into a consolidated IRA can give you a better picture of your overall retirement prospects. It will also give you more leverage when looking to take advantage of an investment opportunity. If you need to protect your retirement, for example, then you could dump all of your funds into precious metals in one place instead of being required to initiate multiple transfers that could each have an associated cost.

Transferring into a Roth IRA if you qualify can also provide a tremendous advantage. The funds that grow in this IRA are tax-free, which means you won’t have to make minimum withdrawals and can contribute contributing to the retirement after you reach a specific age. You’ve already paid the taxes on Roth IRA contributions as well, so you get tax-free growth instead of tax-deferred growth. Rollovers from traditional retirement plans are treated as a distribution, however, so you would have tax liabilities in the year you transitioned to the Roth IRA.

Is There an Advantage To an Employer Consolidation Instead?

If you are going to a new employer with your 401k, you may wish to just transfer the old plan into the new plan. This is especially true if you’re planning to take out a loan on the 401k amount that you have in equity. If you’re above the age of 70.5 and transitioning to a new employer, this will delay the requirement to take distributions.

You may also have a debt situation that may make your retirement plan liable for creditor access if a judgment is obtained against you. Certain retirement plans have greater protections against creditor access, so a trustee-to-trustee transfer might be the best way to protect your money. It can consolidate your plan into something that can still be used for your retirement.

The worst case scenario is taking a full cash-out of your employer sponsored 401k. This can boost your income into a new tax bracket, make you liable to pay penalties of 10%, and you’ll have to pay taxes on the amount received. On a $15,000 cash out, you might lose $1,500 to the penalty and between $2,500-$5,000 on the tax responsibilities. Just about any rollover option is better than this if your finances will allow it.

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