Consolidate retirement assets with a rollover IRA

The U.S. Bureau of Labor Statistics estimates that Americans change jobs about 10 times between the ages of 18 and 42.

If job changers had an employer-sponsored retirement account at just half of those positions, it would represent a significant money management challenge: multiple redundant investment portfolios and a mountain of account statements and investment documentation to sort through.

One flexible solution to simplify the task is to consolidate assets under a single account umbrella via a rollover IRA. Offered by many financial institutions, the rollover IRA can help you streamline your investments into a unified asset allocation plan.

As compared with employer-sponsored retirement accounts, a rollover IRA can provide a broader range of investment choices and greater flexibility for distribution planning. Consider the following benefits rollover IRAs offer over employer-sponsored plans:

• Simplified investment management. You can use a single rollover IRA to consolidate assets from more than one retirement plan. For example, if you still have money in several retirement plans sponsored by different employers, you can transfer all of those assets into one convenient rollover IRA.

• More freedom of choice and control. Using a rollover IRA to manage retirement assets after leaving a job or retiring is a strategy that’s available to everyone. And depending on the financial institution that provides the rollover IRA, you could have a wide array of investment choices at your disposal to help meet your financial goals.

• More flexible distribution provisions. While Internal Revenue Service distribution rules for IRAs generally require IRA account holders to wait until age 59-1/2 to make penalty-free withdrawals, there are a variety of provisions to address special circumstances. These provisions are often broader and easier to exploit than employer plan hardship rules.

• Valuable estate planning features. IRAs are more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries. In addition, IRS rules now allow individuals to roll assets from a company-sponsored retirement account into a Roth IRA. By comparison, beneficiary distributions from employer-sponsored plans are generally taken in lump sums as cash payments.

There are two ways to execute a Rollover IRA - direct and indirect. It’s important you understand the difference between the two, because there could be some tax consequences and additional hurdles if you aren’t careful.

With a direct rollover, the financial institution that runs your former employer’s retirement plan simply transfers the money straight into your new rollover IRA. There are no taxes, penalties or deadlines for you to worry about.

With an indirect rollover, you personally receive money from your old plan and assume responsibility for depositing that money into a rollover IRA. In this instance, you would receive a check representing the value of the assets in your former employer’s plan, minus a mandatory 20 percent federal tax withholding.

You can avoid paying taxes and any penalties on an indirect rollover if you deposit the money into a new rollover account within 60 days. You’ll still have to pay the 20 percent withholding tax and potential penalties out of your own pocket, but the withholding tax will be credited when you file your regular income tax, and any excess amount will be refunded to you. If you owe more than 20 percent, you’ll need to come up with the additional payment when you file your tax return.

While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances.

Also, with a traditional IRA rollover, you must begin taking distributions by April 1 of the year after you reach 70-1/2 whether or not you continue working. Employer-sponsored plans do not require distributions if you continue working past that age. (Roth IRAs do not require the owner to take distributions during his or her lifetime.)

Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Before making any decisions, consider talking to a financial adviser who has experience helping people structure retirement plans.

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Thomas M. Rush is a wealth adviser with Yuma Investment Group. He can be reached at 329-1700.