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Direct Rollover IRAs
If you are changing employers or leaving a job, for whatever reason, you may face a crucial decision: what to do with a lump-sum distribution from your employer's qualified retirement plan? A Direct Rollover IRA is the easiest way to preserve and protect your retirement savings for the future. Here's why: If you have IRA assets at other institutions, consider transferring them to The Commerce Funds. Since all your IRA assets will be reported on The Commerce Funds' consolidated statement each quarter, you'll find it much easier to track and monitor the progress of your IRA assets.
- Your assets continue to grow tax-deferred until withdrawn.
- You protect your retirement assets from current taxes and
the 10% early withdrawal penalty on the distribution.
- You avoid having your distribution reduced by a mandatory
IRS withholding of 20%.
- You can immediately convert the assets in a Traditional Rollover IRA to a Roth IRA, assuming you are eligible.
- You maintain complete control of your retirement assets.
The high cost of taxes and penalties
If you're planning to spend rather than save your retirement plan distribution, you may want to think twice. You'll not only lose an important source of future retirement income, you'll pay a hefty price in terms of taxes and penalties.
| |
Direct Rollover IRA |
Cash distribution |
| Amount of distribution |
$10,000 |
$10,000 |
| Federal income tax due (28%) |
0 |
-$2,800 |
| 10% early withdrawal penalty (if taken prior to age 59 1/2) |
0 |
-$1,000 |
| Assets remaining |
$10,000 |
$6,200 |
| Value of your account after 30 years 1 |
$100,627 |
$33,269 |
- This example does
not reflect state and local taxes, which would reduce the payout even
further. It assumes an 8% average annual return, reinvestment of dividends
and capital gains, a fully taxable distribution, and a 28% federal tax
rate. This example is for illustrative purposes only and is not intended
to reflect the performance of any specific investment or Commerce Fund.
Can you convert to a Roth IRA?
Not directly. If you want to roll over a distribution from an employer plan to a Roth IRA, you must first roll the money over to a Traditional IRA. Assuming you are eligible, you may then convert your account to a Roth IRA.
IRS Circular 230 disclosure: Commerce Bank does not provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, and was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of Commerce Bank should obtain their own independent tax advice based on their particular circumstances.
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