Are you leaving your current employer, preparing to retire or already retired? If so, you may be faced with the decision about how to handle your money that is in an existing retirement savings vehicle. A rollover IRA may be a good choice for you and can help you simplify your investments if you have multiple retirement savings accounts.

Like a retirement plan sponsored by an employer, a rollover IRA continues to shield your savings from income taxes until you withdraw them. And tax deferral makes it possible for your savings to grow faster.

Most retirement plan distributions from a 401(k), 403(b) or governmental 457(b) plan can roll over directly to an IRA without income tax withholding.

When funds are rolled over, earnings on your investment can continue to accrue tax-deferred until withdrawal.

Early Distributions May Be Taxed as Ordinary Income and Receive a 10% Federal Penalty

You may be subject to a 10% tax penalty if you are younger than age 59½ when you receive a distribution that is not rolled over. You may also be subject to a mandatory income tax withholding of 20% if a rollover distribution is paid directly to you — even if you intend to roll over the payment to an IRA in the future. You can avoid federal income tax by replacing the amount withheld with funds of your own and claiming a refund or credit on your tax return. If the amount is paid directly to you instead of directly to the new provider, you have 60 days to roll the funds over to the new provider.

You can avoid tax withholding if you roll the funds directly over to the new provider. If you miss the 60-day deadline, or roll over less than the full amount of the original IRA, the amount withheld may be subject to a 10% federal tax penalty and taxed as ordinary income.

Avoid Tax Withholding with a Direct Rollover

A direct rollover from your present IRA sponsor to your new IRA is an even easier method to reinvest your funds.

Distributions that are not eligible for a rollover include minimum distribution payments, payments based on life expectancy, or payments for a period of 10 years or more.