IRA Direct Rollovers Make Sense

The life-long career outlook has changed. Most people no longer count on one job, one company, or even one career. Today's workers average six job changes during their lives. That could mean six decisions about valuable pension dollars - and six opportunities to blow it.

Essentially, you have three options for avoiding taxes or penalties on pension funds. You might be able to roll funds over into a similar plan at your new job after a qualifying wait time; leave funds with your former employer; or roll funds over directly into an individual retirement account (IRA).

Many investors choose the latter. Spectrem, a Chicago-based consulting firm, estimates that the amount of annual assets rolling into IRAs has increased 38%, to $489.3 billion, since 2004. A direct rollover: 

• Protects your retirement money from immediate taxation. Any payout is considered taxable income in the year you receive it.
• Helps you avoid the 10% early distribution penalty the Internal Revenue Service imposes if you're younger than 59 1/2. 
• Helps you sidestep the mandatory 20% federal withholding on all eligible rollover distributions from qualified retirement plans. 

Despite the penalties, young people typically take the payout to buy a new car or pay off an old car loan. They think that because it's not a huge sum and they're not close to retirement, they don't need to worry about it. But financial experts disagree: You should worry. 

It's cheaper in the long run to finance the car and keep the pension dollars for retirement. Contributions you make in your later earning years never make up the huge compounding effect of your early contributions. 

One note: If you anticipate putting funds into your new employer's pension plan later when you're eligible to, you must directly roll over funds into a new IRA - separate from others.

There are exceptions and special circumstances, but for many Members, a direct rollover into an IRA is the safest, simplest, and most convenient way to protect and accumulate retirement funds.

Copyright 2008 Credit Union National Association, Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.