Saving For College Using Your Retirement Plans: Rolling Over Retirement Accounts
Source: John Wiley & Sons, Inc.
Topics: Advice for Parents, Saving and Investing, Managing Your Money, Other College Savings Plans and Ideas, College Financial Planning
Clearly, when you're looking to raid your retirement accounts to pay for educational expenses, not all types of accounts are created equal. And, if you've spent your entire working life with one company, you have only the one retirement plan that company offers and may be out of luck. You aren't allowed to take money out of a retirement plan of the company you're currently working at and switch it to another sort of retirement plan.
On the other hand, if you're like most people, you probably have moved periodically from job to job over the course of your career as you looked for that perfect place to put down your working roots. And you may have accumulated one or more retirement accounts along the way. If so, you may be in luck.
A retirement account that you have with a company for whom you no longer work may legitimately be rolled over into a traditional or a Roth IRA account. For accounts with low value, the rollover may be mandatory after you leave that company. For accounts with greater value, you may choose to leave your retirement funds under that company's management for as long as you like; you may, however, roll over the funds at any time.
If you don't already have a traditional IRA or Roth IRA account, open the new account before you request the rollover, and then specify to your old company that you want a trustee-to-trustee transfer. When the money is transferred in this way, there is absolutely no tax consequence to you (unless you move the money into a Roth IRA, in which case you'll have to pay income tax on the transaction).
If you forget to make a trustee-to-trustee transfer, your original pension manager will withhold 20 percent of the value of the account for income tax, give you a check for 80 percent of the value of the account, and leave it up to you to deposit 100 percent of the old account value into the new account within 60 days after the withdrawal from the first account. You have to wait until you file your income tax returns the following year to recoup the 20 percent that was withheld.
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