When you leave a job you will probably be faced with the decision of what to do with money accumulated in your company's retirement plan. You may use a special Individual Retirement Account -- a "Rollover" IRA -- to hold the distribution from your former employer's plan (such as a 401(k) or profit sharing plan) until you either transfer it to a new employer's plan, or finally withdraw it in cash.¹

If you use a direct rollover to transfer the distribution to a Rollover IRA account ², no income tax is withheld and you avoid current income tax on the distribution.

If the distribution is first paid to you before rolling it over (it must be rolled over within 60 days) the plan administrator is required to withhold 20% for federal income taxes. In order to avoid current taxation (and a possible 10% penalty tax) on the 20% that is withheld, you will have to make up the 20% withholding out of your own pocket.

If you make use of a Rollover IRA for your retirement plan distribution, you then have two options:

1. Keep the money in the IRA where it may continue to grow tax deferred until you withdraw it, or

2. Roll the funds from the "conduit" IRA into another employer's retirement plan (if it accepts rollovers) at some time in the future.

Other points to consider:

• Once you transfer your retirement account into an IRA, you are in control. You decide how it will be invested and you decide when and how much to withdraw -- you don't need to obtain anyone else's permission. (The IRS does have rules which require you to begin taking distributions once you reach age 70½.)

• If you transfer your retirement account to a new employer's retirement plan, you are limited to investments of your employer's choosing as permitted by that plan, and you are subject to that plan's limitations regarding withdrawals or other distributions. You give up a great deal of control and may have to gain someone else's written permission or concurrence to make changes or withdrawals. Many employers' plans do not permit withdrawals prior to retirement or termination of employment, and many plans impose a fee on you to process your distribution.

• Partial distributions from a retirement plan can also qualify for direct transfer to a Rollover IRA and be tax deferred.

• Traditional IRAs now permit penalty-free withdrawals before age 59½ for qualified higher education expenses and first-time home purchases -- employer-sponsored plans do not.

• Any amount you receive from your company's retirement plan but do not roll over will generally be counted as taxable income in the year you receive it -- and be subject to a 10% penalty tax if you are not yet 59½ (some exceptions may apply). Amounts withheld as tax withholding are considered "received" by you.

• Unlike distributions from 401(k) and Profit Sharing plans, distributions from IRAs are NOT subject to mandatory 20% withholding.

• Any outstanding loan from your employer's retirement plan will generally be treated as a taxable distribution if you do not pay it off. If you have a loan, you should either pay it off or find out from the plan administrator exactly how to continue making scheduled loan repayments after you terminate employment.

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   ¹ Tax issues discussed here reflect federal law; state or local law may differ.
   ² "IRAs" referred to in this discussion are "traditional" IRAs, not Roth IRAs.

The information provided in this article is for informational purposes only and does not consider your particular financial situation. Contact your own professional tax and investment advisors or other professionals to help answer questions about your specific situation or needs prior to taking action based on this information.