Waddell & Reed

IRA Rollover

What is an IRA Rollover?
An IRA rollover allows you to take a lump-sum distribution from your former employer's qualified retirement plan, such as a 401(k) or 403(b), and transfer it directly to another tax-sheltered retirement plan. One such plan is an IRA rollover at Waddell & Reed.

IRA Rollover Benefits
Take control of assets in your former employer’s retirement plan. An IRA rollover offers:

  • Tax-Deferred Retirement Savings - Invest for your retirement years while paying no income taxes today. Investment earnings are tax deferred until withdrawn.
  • Diversified Investment Options - Receive investment diversification and flexibility through a wide variety of mutual funds offered through Waddell & Reed.
  • No Current Income Taxes - You avoid current income taxes, including a mandatory 20 percent income tax withholding and possibly a 10 percent excise tax penalty.
  • Withdrawal Flexibility- If you're between the ages of 59 ½ and 70 ½, you can withdraw what you need from your IRA rollover at any time without tax penalties. You will be responsible for taxes at your current tax rate on any withdrawals. After the age of 70 ½, current tax laws require you to make minimum withdrawals based on average life expectancy. Penalty exceptions are available and may be applicable to your situation.
  • Ability to Avoid Withdrawal Penalties - One of the IRS-approved penalty exceptions is the Substantially Equal Periodic Payment Plan which allows you to take distributions based on your life expectancy and receive an income stream from your IRA rollover at any age, without incurring an early withdrawal penalty. Again, income tax at your current tax rate will be assessed.

Find out if your plan is eligible with the Retirement Plan Rollover Table

Cash Distribution versus Rollover
While it may be tempting to cash out your assets in a former employer's retirement plan instead of rolling them into an IRA or keeping them in your employer's plan, the penalty is significant.

  Cash Distribution Rollover
Total in Your 401(k) Fund $25,0001 $25,000
Distribution/Rollover $25,000 $25,000
Automatic Withholding -$5,000 $0
Additional Federal Taxes $1,2502 $03
10 Percent Penalty $2,500 $0
Total Federal Tax and Penalties $8,7504 $0
You Receive $16,250 $25,000

1 Does not include after-tax contributions
2 Assumes marginal federal tax rate of 25 percent: 25 percent x $25,000 less $5,000 already withheld
3 Taxes deferred until distribution
4 In addition to federal taxes, you may owe state taxes depending on the law in your state.

Options for your assets
You have a variety of alternatives available to you with regard to the assets in your employer's plan. What you choose will depend on your previous employer’s plan document, your specific needs, and the advice of your tax advisor. The following chart describes distributions options available under current regulations.

Option Consequences
Leave distribution in your former employer's plan. Employer retains responsibility for investments. Distribution options may be limited.
Keep/spend your distribution from your qualified plan distribution. Twenty percent of the taxable portion of the amount will be withheld and paid to the IRS. You will be subject to federal (and state) income taxes on the taxable portion of the amount not rolled over, plus a 10 percent penalty for early withdrawal if you are under age 55 when you retire or terminate service.* Certain other conditions may apply.
Receive your distribution and deposit it into an IRA rollover. Lump-sum distributions may be deposited into an IRA rollover account within 60 days of distribution. Expect a 20 percent tax withholding paid to the IRS on the taxable portion of the amount. The 20 percent shortfall must be made up from your own pocket to fulfill the entire rollover amount. Otherwise, the 20 percent amount withheld will be subject to income taxes and possible penalty taxes.
Transfer your distribution directly into an IRA rollover. Instead of receiving a lump-sum distribution from your retirement plan, your previous employer can transfer your distribution directly to a rollover IRA. This allows you to avoid the 20 percent tax withholding and early withdrawal penalties, and you will defer income taxes on the distribution until you make withdrawals.
* If you are between the ages of 55 and 59½ talk to your tax advisor about early withdrawal penalties.

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